When to Avail Capital Gains Account Scheme to Save Income Tax After Realizing Long-Term Capital Gains

Capital Gains Account Scheme (CGAS) is a valuable tax-saving avenue for individuals and Hindu Undivided Families (HUFs) who have realized long-term capital gains through the sale of assets like land, property, or equities. Knowing when and how to avail this scheme can assist taxpayers in saving or deferring taxes.

What is Capital Gains Account Scheme (CGAS)?

CGAS is a facility provided under the Income Tax Act, 1961, to help taxpayers save tax on long-term capital gains. In case a taxpayer cannot invest the capital gains in the assets within the stipulated assets before the filing due date of the Income Tax Return (ITR), they can park the gains temporarily in a Capital Gains Account.

The account may be opened with any public sector bank authorized to do so, providing a secure and compliant means of holding money until it is reinvested in qualified assets.

When Should You Use CGAS?

1. When You Plan to Buy a New Property

If you have gained capital from selling a property and want to buy another residential property, CGAS permits you to invest the gains until the acquisition is made within 2 years.

2. When You Are Building a New Property

For those who are building a new residential property, the construction has to be completed within 3 years from the sale date. CGAS assists by allowing you to keep the gains in a dedicated account during this time.

3. When You Can’t Reinvest Instantly

At times, unavoidable delays may preclude immediate reinvestment. Transferring the funds into CGAS prior to the filing of ITR will enable you to claim exemption under Section 54 or Section 54F.

4. When You Want to Avoid Tax Liability

Rather than incurring a high capital gains tax, CGAS presents an option of keeping the tax liability under control while determining the best reinvestment option.

Types of Capital Gains Accounts

Two kinds of accounts exist under CGAS:

Account Type A (Savings Account):

Operates like a standard savings account.

Appropriate if you require money from time to time for construction of property.

Accrues interest similar to a savings bank account.

Account Type B (Term Deposit Account):

Acts similar to a fixed deposit.

Most suitable for withdrawing money all at once.

Aids in greater interest than that of Account Type A.

Procedure to Open a Capital Gains Account

Proceed to a registered public sector bank providing CGAS.

Apply by submitting the Form A for account opening.

Relate applicable details such as PAN, address, and asset sale proof.

Make a selection among Type A or Type B account based on your need.

Tax Relief Under Various Sections

Section 54: When you sell a residential property and invest the capital gains in another residential property within 2 years or build one within 3 years, you can avail exemption.

Section 54F: Applicable for long-term asset capital gains (excluding a residential property) if you invest in a residential property.

Section 54EC: Where the gains are invested in bonds of a specified nature issued by an entity such as REC or NHAI in a period of 6 months, the exemption can be availed.

FAQs on Capital Gains Account Scheme

Q1. For how long can I maintain funds in the Capital Gains Account?

You can maintain funds in CGAS for 2 or 3 years, as the case may be, depending upon the category of the capital gains and the nature of reinvestment.

Q2. What if I fail to use the funds within the given time?

If the amount is not used within the stipulated time limit, the unused funds will be taxed as long-term capital gains in the financial year in which the time limit lapses.

Q3. Can I withdraw money from the Capital Gains Account repeatedly?

Yes, withdrawals are possible through Form C for Type A accounts. Withdrawals are, however, limited and subject to conditions for Type B accounts.

Q4. Is interest earned on CGAS taxable?

Yes, the interest on deposits in a Capital Gains Account is taxable based on the income tax slab of the individual.

Q5. Can I increase the deposit tenure?

No, the deposit cannot be extended beyond the given time limits under the concerned sections.

Q6. Are NRIs eligible to save tax on capital gains under CGAS?

No, CGAS is only for resident individuals and HUFs.

The Capital Gains Account Scheme is a strategic tool to save taxes while ensuring compliance with the Income Tax Act. By using CGAS, taxpayers can effectively manage their long-term capital gains without worrying about immediate reinvestment. Careful planning and adherence to the timelines will maximize the benefits of this scheme.

For further guidance, it is advisable to consult with a tax advisor or financial planner.

Disclaimer: The information contained in this article is for general purposes only. Seek advice from a tax professional regarding personal guidance on investments and taxation of capital gains.