If a person is claiming Capital Gains Exemption, he is required to deposit the money in a Capital Gains Account before the due date of filing of ITR. This article explains in detail about How to open a Capital Gains Account, its tax benefits and features.
For example: Mr. A sold a residential property in January 2022 and he intends to claim capital gains exemption by purchasing a new residential house. To claim the capital gains exemption, he is required purchase the new residential house within 2 years i.e. before January 2024. However, the due date of filing of ITR for the Financial Year 2021-22 is 31st July 2022 and the gains arising on the sale of the property are required to be reported in the ITR.
In such cases, the govt prescribes that the amount to be reinvested be deposited in a Capital Gains Account before the filing of the ITR. The seller does not immediately have to deposit the amount in the Capital Gains Account and he can do so at any time before the due date of filing of ITR i.e. before 31st July for non-audit cases and before 30th Sept for audit cases.
By claiming this Capital Gains Exemption, the taxpayer would be able to save the 20% Long Term Capital Gains Tax which he would be required to pay in case he does not intent to claim this exemption. (Refer: Capital Gains Tax in India)
How to open Capital Gains Account?
The Capital Gains Account can be opened under the provisions of the Capital Gains Account Scheme, 1988 and as per the Capital Gains Account Scheme the amount of capital gains to be claimed as an exemption should be either be re-invested or deposited in the Capital Gains Account before the due date of filing of returns.
The Govt has notified 28 banks which can open the Capital Gains Account on behalf of the Govt. All branches of these 28 banks except Rural Branches are authorised to open the capital gains account. Private Banks like HDFC, ICICI etc are not authorised to open Capital Gains Account and this account cannot be opened online as well.
To deposit the amount in the capital gains account, the taxpayer would first be required to apply for opening the account by making in application in duplicate Form A (Download Form A). He would also be required to submit the following documents along with Form A – Proof of Address + Copy of PAN Card + Photograph. You would be personally required to visit the bank branch and submit the physical copy of the documents to be able to open a Capital Gains Account.
The payment for deposit in the Capital Gains Account Scheme shall be made either in cash or cheque or demand draft along with the application. Such deposit can be made either in lump-sum or in installments. Entire amount need not necessarily be deposited at the time of opening of the account. A small amount may be deposited at the time of account opening and the balance can be deposited later.
If the deposit is being made by way of cheque or demand draft then, subject to the cheque or draft being realised, the effective date of deposit for the purpose of claiming exemption will be the date on which the cheque or draft is received in the deposit office along with the application form.
A taxpayer intending to avail the benefit under more than 1 Section of the Income Tax Act shall make separate applications in the same manner for opening an account under different sections of the Income Tax Act.
The Capital Gains Account can be opened in any authorised branch across India and not necessarily in the same state where the asset is sold.
Types of Capital Gains Account Scheme
There are 2 types of Capital Gains Account which are as follows:-
- Capital Gains Account – Type A – Savings Account: This is like a normal savings account and the interest payable on this account is the same as the interest paid on normal savings account by that bank. In case of Type A Account, the deposit office shall issue a pass book to the depositor wherein all amounts of deposits, withdrawals, together with the interest due, shall be entered over the signature of the authorised officer of the Bank.
- Capital Gains Account -Type B – Term Deposit Account: This is like a fixed deposit wherein the amount is deposited for a fixed period of time. The interest rate on this account is equivalent to the interest paid on fixed deposits by the bank. As Type B accounts are same as Fixed Deposits Account, any withdrawl from this type of account attracts a penalty for pre-maturity withdrawl. In case of Type B Account, the deposit office shall issue a deposit receipt wherein the principal amount of deposit, date of deposit, date of maturity of deposit shall be entered over the signature of the authorised officer of the Bank.
Capital Gains Account Type A is advised when the amount of capital gains is to be used for construction of a house as the amount would be required to be withdrawn in various stages. Type B Term Deposit Account is advised when the amount of capital gains is to be utilised for purchase of a house.
Capital Gains Account Type B is also of 2 types – Cumulative and Non-Cumulative. Under the cumulative option – the interest is re-invested and the total amount is paid at the time of the completion of the term period or at the time of withdrawl (whichever is earlier). Under the non-cumulative option, the interest is paid at regular intervals and is not reinvested.
Interest on Capital Gains Account Scheme
- The Interest at such rates as may be specified by the Reserve Bank of India (RBI) from time to time shall be allowed for each calender month on the lowest balance between the close of the 10th day and the end of the month and shall be credit to the account at the end of each half year.
- In case of cumulative deposit in Account B, the amount of interest accrued will be deemed to have been reinvested and in case of non-cumulative deposit in Account B, the amount of interest due will become due and payable at quarterly intervals.
- In case of conversion of the account or premature withdrawl from the account or closure of the account, the interest payable shall be the interest rate applicable for the period for which the amount was deposited less 1% as penalty for premature withdrawl.
- The interest earned on the Capital Gains Account would be chargeable to tax as per the Income Tax Slab Rates.
Withdrawl from Capital Gains Account Scheme
The amount deposited in the Capital Gains Account can be withdrawn by making an application in Form C. The amount so withdrawn has to be utilised within 60 days from the date of such withdrawl and only for the purpose of such withdrawl. The unutilised amount should be re-deposited immediately.
For subsequent withdrawl, the application is required to be made in Form D by detailing the manner/purpose for which the previous withdrawl has been utilised.
Many Banks don’t issue any cheque book for the capital gains account and amount as the amount is to be withdrawn not using a cheque but by furnishing an application in Form C/ Form D.
No approval from the Income Tax Dept is required before withdrawing any amount from the Capital Gains Account. The approval from the Income Tax Dept is only required at the time of closure of the account.
Transfer and Conversion of Capital Gains Account
- A depositor, if he so desires, may apply for transfer of his capital gains account, from one deposit office to another deposit office of the same bank.
- A depositor, if he so desires, may also apply in Form B for transfer of a part of or all the funds from Type A Account to Type B Account and vice-versa.
- A depositor may also convert the whole of his Type A account into Type B Account and vice-versa.
- If a request has been received for transfer of amount from Type B to Type A and vice versa before the expiry of the specified period for which the deposit was made, such request shall be treated as premature withdrawl of amount.
Other Features of Capital Gains Account
- Only Individuals and HUF are allowed to open capital gains account.
- The amount deposited in the Capital gains account cannot be offered as a Security for any Loan/ Guarantee.
- The Interest on such account is not tax-free and TDS is also liable to be deducted from such account as per the provisions of the income tax act. (Recommended Read: Tax on Interest Fixed Deposits, Tax on interest on savings account)
- The taxpayer can also appoint nominees to this account by making an application in Form E. Such nomination can also be varied by making an application in Form F.
- To close the Capital Gains Account, an application in Form G is required to be made. In case of the death of the depositor, such application would be required to be made by the nominee/legal heirs in Form H.
- The approval of the income tax officer who has the jurisdiction of the depositor is also required at the time of making an application for the closure of the account.
If the amount deposited in the capital gains account is not utilised for the specified purpose before the expiry of the specified time, the amount of capital gains not utilised would be chargeable to tax as Long Term Capital Gains in the financial year in which the time period expires.
The unutilised deposit amount in the Capital Gains Account Saving Scheme in the case of an individual who dies before the expiry of the 2/3 years stipulated period under section 54, 54B, 54D, 54F and 54G, cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of the legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate. (Circular No. 743, dated 06-05-1996)
e-Book on Capital Gains Tax on sale of Real Estate Property
There are various sections which govern the taxability of Capital Gains on sale of Real Estate Property. Moreover, there are certain exemptions as well which are allowed to be claimed and in some cases the amount is also required to be deposited in the Capital Gains Account.
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1. Computation of Capital Gains
2. Tax on sale of Inherited Property
3. Tax on sale of Under-Construction Property
4. Sale of Property below Circle Rate/ Stamp Valuation Rate
5. Capital Gains Exemptions on sale of Property
6. TDS on sale of Property
7. More than 40 Comprehensive Examples
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