What is capital gains account scheme?
Whenever a house property is sold, the owner of the property is liable to pay income tax on capital gain (profit earned) from the transaction. The long-term capital gain on house property arises when the duration between the purchase and sale of a property is more than 24 months which is calculated as under.
- Sale price of house property (xxxx)
- Less expenditure like brokerage, commission, advertisement etc.) ( xxx)
- Net sale consideration (i) – (ii) (xxxx)
- Less Indexed Cost* of acquisition (Purchase price of property ) (xxxx)
- Less Indexed cost of improvement (xxxx)
(Capital Expenses incurred after the Purchase of Property)
*Net Capital Gains (iii) – (iv+ v) (xxxx)
* Indexed cost is arrived using Cost inflation Index given by the IT department.
How to avail exemption from capital gain tax?
Section 54 of the Income Tax Act provides exemption from tax on long-term capital gains arising out of sale of house if the gains are invested in purchase of another house either a year before or within two years from date of transfer, or used for construction of a house within three years of date of transfer. As it may take time to search and buy new house or construct a house on open land, the individuals and HUF can in the mean time open a CGAS account and deposit the sale proceeds in that account to avail exemption from long term capital gain tax. The authorized/ approved branches of the public sector banks viz. Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra ,Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce, Punjab National Bank, Punjab & Sind Bank, State Bank of India, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India, & Vijaya Bank are permitted to open account under CGAS. Rural branches of these banks are not included in authorized list of banks to open CGAS.
Which type of capital gain account to be opened?
Two types of accounts can be opened in banks under Capital Gain Account Scheme(CGAS) viz. CGAS savings account (Account A) or CGAS term deposit (Account B). Entire capital gain from transfer of the property must be deposited to the CGAS account opened by cash, cheque or draft to be eligible for tax exemption. Account ‘A’ is in the form of savings deposit account; money may be withdrawn from the account from time to time for the specified purpose indicated under the scheme. Money withdrawn shall be utilized for specified within 60 days of withdrawal; unutilized money may be re-credited to in Deposit Account ‘A’. This account is suitable for assesses who are planning to construct a house over a period of time.
‘Account ‘B’ is term deposit which can be opened for a period of 3 years from date of transfer of original asset. The interest earned on the deposit may either be withdrawn periodically or it may be reinvested. The interest earned on CGAS deposits is taxable and TDS will be deducted as per provisions of income tax. The deposits maintained under capital gain account cannot be used to avail loan or be offered as security for loan or guarantee. Nominee can be appointed by making an application in form E, Change of nominee can be made by form F.
How to open and operate Capital Gain account?
It is a common mistake committed by many people to open the normal savings bank account or a normal deposit account instead of opening an account under Capital Gains Account Scheme. Application shall be submitted in form mentioning the form of account whether type ‘A’ or ‘B’ along with necessary documents including copy of PAN card, address proof and photograph etc. Money may be deposited in CGAS account in lump sum or in installments before the last date of filing IT return. For example, a sale is effected in the month of April 2017, in that case, the taxpayer may deposit the entire capital gain from transfer of the property in CGAS account on or before the last date for filing returns (i.e.31.08.2018) and the proof of deposit into the CGAS account should be attached along with income tax return to claim exemption from long term capital gain tax for the financial year during which the transfer was made.
The withdrawals from Deposit Account ‘A’ can be made through a prescribed form. For withdrawal of money from Deposit Account ‘B’, the depositor will first have to transfer the amount to Deposit Account ‘A’ and then make the withdrawal. The account holder shall apply for withdrawal in form C. Where the amount of withdrawal exceeds Rs.25000/-the bank will make the payment by way of crossed demand draft or Bankers cheque drawn in favour of the person to whom the depositor is intended to make the payments. For the subsequent withdrawals the depositor shall furnish the application in Form No D in duplicate containing the details regarding the manner and the extent of utilizing of the amount in respect of the immediately preceding withdrawal. The bank after receiving two copies of Form D from the accountholder will retain one copy and return the other copy to the tax payer.
How to close Capital Gain Account?
Account ‘B’ can be closed at maturity and proceeds transferred to Account ‘A’. While closing Account ‘A’, assesse is required to produce an authority letter or certificate from the income tax authorities. Once the new property is purchased or the construction has been completed, the depositor may close the capital gain account by making an application for closure in Form G with the approval of assessing officer.