Are you planning to sell a property or sold one already? Do you know that capital gains from your property are taxable? But Income Tax Act provides various exemptions & benefits that you can avail to avoid capital gain tax on sale of property. One of such benefits is Capital Gain Account Scheme. In this guide we have explained the features, benefits and everything you need to know about Capital Gain Account Scheme 1988.
What is Capital Gain Account Scheme 1988?
Capital Gain Account Scheme 1988, as the name suggests, was introduced in the year 1988 to provide a facility to people to take advantage of Long Term Capital Gain Tax benefits under section 54, 54B, 54D, 54F and 54 G. Under this scheme, if you have sold a property after 36 months of acquisition, you can open a Capital Gain Account in an authorized bank for crediting amount from Capital Gains from sale of property.
For instance, to avoid long term capital gain tax from the sale of your residential property, under section 54 of IT Act you need to purchase another house property within 2 years or construct a house within 3 years from the date of sale. Until you purchase your second house property, you can deposit your capital gain amount in a CGAS account and avoid capital gain tax.
Please note that you should deposit capital gain amount in the Capital Gain Account Scheme before filing income tax returns for financial year in which you sold the property.
For eg. if you sold your house on 4 May 2015, you can purchase or construct a house by 31 July 2016 (last date of return filing for FY 2015-16) without opening a CGAS account. In case, you are not able to buy or construct a property by 31 July 2016, you must deposit capital gains amount in a CGAS Account before 31 July 2016.
Advantages of Capital Gains Account
- You will get adequate time to search for a new property.
- You will get exemption on long term capital gains tax.
- You will earn interest on your deposit.
Who is eligible for Capital Gain Account Scheme?
- Resident individuals, body of individuals
- Non-individuals like Hindu Undivided Family, Association of persons etc.
- Companies or firms – Proprietorship Firms, Partnership Firms, Companies
- Resident but Not Ordinary Resident (RNOR)
- Non-Resident Indians (NRIs)
- Artificial Judicial persons who have capital gains taxable in India.
How to open Capital Gain Account?
You can apply for opening an account under Capital Gain Account Scheme by submitting following documents at any of the 29 authorized banks.
Documents Required to open Capital Gain Account
- Form A to be filled in duplicate
- Proof of Address
- Copy of PAN Card
- 2 recent passport sized photographs
- Unstamped HUF letter in case account is for Hindu Undivided Family (HUF)
List of Banks providing Capital Gains Account Scheme
Only 29 PSU Banks are authorized to open an account under Capital Gain Account Scheme 1988. These are:
State Bank of India, State Bank of Saurashtra, State Bank of Bikaner & Jaipur, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Hyderabad, State Bank of Travancore, Bank of India, Central Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, UCO Bank, United Bank of India, Syndicate Bank, Dena Bank, Union Bank of India, Indian Bank, Allahabad Bank, Andhra Bank, Bank of Maharashtra , Corporation Bank, Indian Overseas Bank, New Bank of India, Punjab & Sind Bank, Oriental Bank of Commerce, Vijaya Bank & IDBI Bank.
All branches except rural branches of these banks are authorized to open capital gain account and receive deposit under Capital Gain Account Scheme 1988.
How to make deposits?
The capital gain deposit shall be made in Capital Gains Account Scheme either in cash or by cheque or demand draft along with application and necessary documents. The deposit can be made in lump-sum or installments.
In case the deposit is made by cheque or demand draft, the effective date of deposit for the purpose of tax exemption will be considered as the date on which the cheque or draft is received by the bank.
Tax benefit under more than 1 section
If you want to avail tax exemption under more than one section of IT Act, you should open separate capital gains account for each and hence make separate applications for account opening.
Types of Deposits under CGAS
Under Capital Gain Account Scheme 1988, there are two types of deposit accounts available – Type A and Type B.
Type A Deposit Account (Savings Account)
Type A deposit account is like a normal savings account and interest payable on this account is also that of savings account. For type A account, the bank will issue a pass book which will be updated with amounts of deposits, withdrawals and interest amount.
Type A account is suitable for those who want to construct a house over a longer time period as withdrawals are permitted like a normal savings account.
Type B Deposit Account (Term Deposit Account)
Type B deposit account is like a fixed deposit account where the term of the deposit is fixed. The interest rate is same as that of a normal fixed deposit. However, if you withdraw some amount before the maturity of deposit, you will have to bear penalty for pre-mature withdrawal. For Type B account, the bank will issue a deposit receipt which would mention the principal amount deposited, maturity amount, date of deposit and date of maturity.
Type B Capital Gains Account is of two types – cumulative and non-cumulative. In cumulative deposit, the interest is re-invested and the total amount will be paid at maturity. In non-cumulative deposit, the interest is not re-invested but paid at regular intervals.
Type B account is suitable for those who want to purchase a house after a certain time.
To open a capital gain account, you will have to fill Form A where you will have to mention whether you want to deposit your capital gain amount in Account A or Account B. You can also choose to deposit money in both types of accounts.
Conversion of Account
Using Form B, you can convert your entire capital gain deposit from Type A to Type B or vice versa. You can also transfer part funds from Type A to Type B or vice versa.
In case, you convert an account before expiry/ maturity period of an account, such conversion will be treated as pre-mature withdrawal of deposit.
Features of Capital Gain Account Scheme 1988
Withdrawal from Capital Gain Account Scheme
- Amount deposited in Capital Gain Account can be withdrawn by using Form C when you are withdrawing for the first time. For subsequent withdrawals, you will have to apply using Form D in duplicate. In Form D, you will have to furnish the details regarding the manner and extent of utilization of immediate preceding withdrawal amount. The bank will keep one copy of Form D and return the other copy to you.
- If withdrawal amount exceeds Rs. 25,000, the bank will make payment by way of crossed demand draft in favor of person to whom the payment is to be made.
- Any withdrawal amount under Capital Gain Account Scheme should be utilized for purchasing or constructing the house property within 60 days from the date of withdrawal. Any unutilized amount should be re-deposited immediately in Account A. If you do not comply with this rule, you will stand to lose tax exemptions under relevant section.
- If you want to make a premature withdrawal from Type B account, you will have to first convert your Type B account to Type A.
Penalty on Deposit Amount
Banks charge penalty on conversion of account from type A to B or vice versa, premature withdrawal from account or closure of account. Generally, the penalty is charged at the rate of 1% p.a. from the interest payable.
Minimum and Maximum Amount
For capital gain account, minimum deposit amount is Rs. 1000 while there is no upper limit on the amount you can deposit.
Period of Deposit
Max 24 Months – If you plan to claim long term capital gain tax benefit under section 54B, or 54F (as declared by you in Form A). This means if you are planning to purchase another residential property then you can keep deposit in a Capital Gains Account for maximum 2 years.
Max 36 Months – If you plan to claim long term capital gain tax benefit under section 54, 54D, 54G or 54GB (as declared by you in Form A). This means that if you are planning to construct a house property then you can keep deposit in a Capital Gains Account for maximum 3 years.
If you do not withdraw your amount from Capital Gain Tax within 3 years, you will have to pay long term capital gains tax.
The interest rate applicable is normal savings rate for Type A deposit and normal fixed deposit rate for Type B deposit.
Please note that interest earned on deposit in a Capital Gain Account is taxable just like normal bank interest.
You cannot avail any loan against the Capital Gain deposit. This deposit shall not be offered as security for any loan or guarantee and shall not be charged or alienated in any manner.
Closure of Account
Once, you have purchased the property or constructed your house within allowable time, you can close your Capital Gain Account by filling up Form G. You will also have to submit an approval letter from the Income Tax Officer of your jurisdiction along with the Pass Book/ Deposit Receipt. The bank will pay to you any balance amount in the Capital Gain Account.
In case of death of the depositor, the nominee/ legal heir can close the account by filling Form H.
Transfer of Account
A capital gain account can be easily transferred from one branch to another branch of the bank.
You can nominate upto 3 persons by filling up Form E. In case, you want to make any changes to the nomination, you can do that by filling Form F.
A Common Mistake to Avoid
Many people are not aware of Capital Gain Account Scheme 1988. They commit the mistake of depositing Capital Gain amount in a normal savings account and later on use that money for purchasing or constructing the house. However, Income Tax law very specifically says that capital gain amount that is to be utilized for buying or constructing a property shall be kept exclusively under Capital Gain Account Scheme.
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