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When you sell a capital asset, the money you receive on sale is called capital gains. To encourage the reinvestment of such capital gains, the Indian government provided tax relief on the condition that the capital gains be reinvested in certain specified assets within the stipulated time frame. However, sometimes the time frame is long and exceeds the date of filing returns. To ensure that investors don’t miss out on the benefits and exemptions, the Capital Gains Account Scheme was introduced.
What is the Capital Gains Account Scheme?
Introduced in 1988, the Capital Gains Account Scheme allows individuals to park their capital gains until the point when they can be reinvested in assets specified in Sections 54 and 54F of the Income Tax Act, 1961, protecting their long-term capital gains. This allows you to deposit the underutilized capital gains, making you eligible for the capital gains exemption you will receive once you reinvest.
When can you deposit in the Capital Gains Account Scheme?
You can deposit your capital gains in the Capital Gains Account Scheme when you are unable to reinvest them in a specified investment asset before the stipulated time limit expires for that specific investment and before the due date of filing income tax returns.
Who can deposit in the Capital Gains Account Scheme?
As stated in Section 54 and Section 54F, based on the taxpayer category for capital gains, you can check if you are eligible to invest in the Capital Gains Account Scheme.
Section Number |
Category Of Taxpayer |
Capital Gains Earned On |
54 |
HUF or Individual |
Sale of a residential house |
54D |
Any taxpayer |
Compulsory acquisition of building and land |
54B |
HUF or Individual |
Sale of land used for agriculture |
54E |
Any taxpayer |
Sale of any long-term capital asset |
54F |
HUF or Individual |
Sale of a long-term capital asset that is not a residential property |
54EC |
Any taxpayer |
Sale of long-term capital assets, including building, land, or both |
54G |
Any taxpayer |
The transfer of assets, such as plant, building, land, machinery, right in building or land, when shifting an industrial undertaking from an urban area |
54GB |
Any taxpayer |
Residential property transfer |
54GA |
Any taxpayer |
The transfer of assets, such as plant, building, land, machinery, right in building or land, when shifting an industrial undertaking from an urban area to a Special Economic Zone (SEZ) |
Where can you open a Capital Gains Account?
You can open a Capital Gains Account in any branch of the authorised banks, except for their branches in rural areas.
How do you open a Capital Gains Account?
The following steps will outline the process to open a Capital Gains Account.
To start your application, you need to fill up Form A first.
Submit it along with the necessary documents, such as proof of address, PAN Card copy, and a photograph.
The deposit can be made in the form of a cheque, cash, or demand draft. If you are depositing the amount through a cheque or demand draft, the deposit date will reflect the date on which the cheque or demand draft was received at the deposit office, subject to realisation.
You can make the deposits in instalments or as a lump sum payment.
If you intend to invest in both a house and government bonds under the different sections of the Income Tax Act, you are obligated to open separate accounts for them.
What are the different types of deposits available?
There are two different types of deposits that you can avail of under the Capital Gains Account Scheme.
Type A: Referred to as a savings deposit, this capital gains account is similar to a regular savings account. It even earns a similar interest rate. The interest is credited at regular intervals, and you will receive a passbook to record all your transactions. Like a savings account, this type of deposit is highly liquid, so you can easily withdraw at any time.
Type B: Referred to as term deposits, this type of deposit is similar to fixed deposit schemes of banks. The rate of interest, terms of investment, and restrictions are also very similar to that of a fixed deposit. This type of account has a maximum term of 3 years, and it will not auto-renew at the end of the term. Like you would with a fixed deposit, you will receive a deposit certificate, which will be required when you need to withdraw. The term deposits can be cumulative or non-cumulative.
For both types of deposits, the RBI fixes the rate of interest periodically. Based on your plan of investment and rate of interest, you can select the deposit type that best aligns with your requirements.
How do you withdraw from the Capital Gains Account Scheme?
Depending on the type of deposit you’ve made, the withdrawal terms differ. For a type A deposit, there are no restrictions on withdrawing from your account. However, for a type B deposit, you first have to transfer the money to a type A account and then withdraw. A penalty may be charged on premature withdrawals.
The money withdrawn has to be reinvested in a specific investment within 60 days of the withdrawal or immediately redeposited in a type A account. The first time you withdraw, you need to submit Form C. For every subsequent withdrawal, you need to submit Form D with the details of how the previous money was used.
What are the taximplications?
When filing your returns, it is mandatory to attach the deposit proof to be exempted. If you have underutilized any amount beyond the 60-day mark or beyond the specified time limit, the amount is eligible for tax. The interest earned on both types of deposits is liable for tax, and a TDS certificate will be issued to you.
A few things to remember when depositing your capital gains in the scheme are that the scheme can’t be used as collateral when applying for a loan. It is prudent to nominate up to three people who will inherit the money. When closing the account, both types of deposits require approval from your jurisdictional income tax officer.
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L&C/Advt/2021/Jun/1009
