Under the existing law in India, gains arising on transfer of capital assets are charged under capital gains. At the same time, relief is provided under Section 54 to 54GB of the Income Tax law if the proceeds acquired from the sale of a capital asset are reinvested in specific instrument within a specified period.
Meanwhile, a taxpayer has the option to keep the proceeds thus earned in a capital gain account under the Capital Gains Account Scheme (CGAS), 1988.
What is the Capital Gains Account Scheme?
In many instances, the time limit prescribed under the Income Tax law to reinvest money generated from sale of capital assets is longer than the due date to file the Income Tax Return (ITR). In such a case, the taxpayer runs into the risk of losing tax exemptions. To address this problem, the Central government in 1988 launched the Capital Gains Account Scheme. It enables taxpayers to treat the amount kept in the capital gains account to claim exemption as would be the case if it were re-invested.
However, if money kept in this account is not used for the specified purpose within the prescribed time, the exemption claimed by the taxpayer will be withdrawn, and gains would become taxable. The unutilized amount of capital gains will be chargeable as long-term capital gains in the financial year in which the time expires.
What are the types of capital gains accounts?
There are two types of capital gains accounts:
Capital Gains Account Type-A: Savings account
This is like your standard savings account. Your bank issues a passbook, and you earn interest on deposits. Opening this type of account is recommended for people planning to use the capital gains in construction of a house or buyers of under-construction properties who need to pay regular payments.
Capital Gains Account Type-B: Term deposit account
This is like your standard fixed deposit account. After opening this account, the bank will issue you a deposit receipt mentioning details, such as the principal amount, date of deposit, date of maturity, etc. You will earn the same interest on this deposit as a fixed deposit holder with the bank. However, pre-mature withdrawal attracts a penalty.
From the point of view of interest payments, Type-B capital gains account can be of cumulative or non-cumulative type. In a cumulative type of account, the bank will invest the interest and the customer will be paid the entire amount at the time of withdrawal of the deposit. In the non-cumulative type, the interest is not reinvested and paid at regular intervals.
Type-B capital gains account is recommended for those planning to re-invest capital gains for purchasing a house.
Who is eligible for Capital Gains Account Scheme?
Under Section 54 to 54F of the Income Tax Act 1961, the following category of taxpayers are eligible to deposit capital gains under the Capital Gains Account Scheme.
| Section | Capital asset | Taxpayer category |
| 54 | Sale of residential property | Individual and HUF |
| 54B | Sale of land used for agricultural purposes | Individual and HUF |
| 54D | Compulsory purchase of land and building | All taxpayers |
| 54E | Sale of a long-term capital asset | All taxpayers |
| 54EC | Sale of a long-term capital asset like land, or building, or both | All taxpayers |
| 54F | Sale of a long-term capital asset, which is not a residential property | Individual and HUF |
| 54G | Transfer of assets (machinery, plant, or building, land, or rights over land or building) in case of shifting of industrial undertaking from urban areas | All taxpayers |
| 54GA | Transfer of assets (machinery, plant, or building, land or rights over land or building) in case of shifting of industrial undertaking from urban areas to Special Economic Zone | All taxpayers |
| 54GB | Transfer of residential property | All taxpayers |
When can a taxpayer deposit in a capital gains account?
A taxpayer can deposit capital gains in a capital gains account before the filing of the ITR. You can deposit in the account only if you are unable to invest it before the due date for filing the ITR i.e. July 31 after the given assessment year.
List of banks where you can open a capital gains account
The government has authorized 28 banks that can open a capital gains account on its behalf. These include:
- State Bank of India and its subsidiaries
- Central Bank of India
- Corporation Bank
- Bank of India
- Punjab National Bank
- Bank of Baroda
- UCO Bank
- Canara Bank
- United Bank of India
- Union Bank of India
- Allahabad Bank
- Indian Bank
- Bank of Maharashtra
- Indian Overseas Bank
- New Bank of India
- Punjab & Sind Bank
- Syndicate Bank
- IDBI Bank
Note: Rural branches of any of these banks are not authorized to receive the deposit and maintain account under Capital Gains Accounts Scheme, 1988.
List of documents required to open a capital gains account
You will need the following documents to open a capital gains account under the Capital Gains Account Scheme.
- Duly filled Form A
- PAN
- Proof of ID: Aadhaar card, driving license, voter ID
- Proof of address: Aadhaar card, driving license, voter ID
- Photos
How to open a capital gains account?
Step 1: Visit a branch of an authorized bank and ask for Form A.
Step 2: Fill in the form providing all the details.
Step 3: Submit it along with photocopies of the necessary documents.
How to withdraw an amount from a capital gains account?
The deposit in a capital gains account can be withdrawn by making an application on Form C. After the withdrawal, the money must be re-invested within 30 days for the purpose stated in ITR. In case, you are not able to re-invest the money, it must be immediately re-deposited.
To withdraw it again, you will have to apply using Form D. Your application must state the purpose and manner of re-investment of the funds.
How to close a capital gains deposit account?
To close a capital gains deposit account, you would require prior approval from the jurisdictional income tax officer. After receiving this approval, you can apply for closing of the account in Form G with the proof of the income tax officer’s approval. If the nominee or the legal heir of the account holder is submitting this application, they will have to submit Form H in place of Form G.
Important forms for capital gains account
| Form A | To apply for new capital gains account |
| Form B | To apply for conversion of capital gains account |
| Form C | To withdraw funds from capital gains account |
| Form D | To apply for account type change/to apply for account transfer within a bank |
| Form E | To add a nominee by an individual or an HUF |
| Form F | To get an approval from the income tax officer for closing the account |
| Form G | To apply for closing of the account |
| Form H | To be used by legal heirs to close the account |
FAQs
Which assets qualify as capital assets?
Under Income Tax laws in India, capital assets include the following: Any kind of property held by a taxpayer, whether connected with his business or profession. Any securities held by a Foreign Institutional Investor, which has invested in such securities in accordance with the regulations made in the SEBI Act, 1992. Any ULIP to which exemption under Section 10 (10D) does not apply on account of the applicability of the fourth and the fifth proviso.
When shall I deposit money in the capital gains account?
Those claiming capital gains exemption must deposit the capital gains in such an account before filing the ITR.
Can a capital gains account be opened online?
No, a capital gains account can’t be opened online. Taxpayers should visit a branch of a bank authorized to open a capital gains account and apply with supporting documents.
What is the mode of payment in a capital gains account?
A taxpayer can deposit funds in this account in cash, cheque, or demand draft. He can make a lump-sum payment. He can also deposit money in installments. Even if you are paying through a cheque or a demand draft, the effective date of deposit for the purpose of claiming exemption will be the date on which the cheque or draft was deposited.
Do I have to deposit the full capital gains amount in the capital gains account?
No, the deposit can be made in installments. You have the option to open an account with some money earned as capital gains. You can pay the remaining in installments.
Do I have to open multiple capital gains accounts to claim different types of capital gains?
Yes, if you are planning to claim tax benefits under multiple sections of the Income Tax law, you will have to apply separately for opening an account.
Do banks issue a cheque book for a capital gains account?
Most banks don’t issue cheque books for a capital gains account as money from this account must be withdrawn using either Form C, or Form D, and not a cheque book.
Do I need approval from the Income Tax Department to withdraw money from a capital gains account?
No, you don’t need any approval from the Income Tax Department to withdraw money from a capital gains account.
Is interest earned on capital gains account tax free?
No, interest earned on a capital gains account is not tax free. The bank will deduct TDS before releasing the interest.
Can I appoint a nominee for a capital gains account?
Yes, you can appoint a nominee for a capital gains account.
Can money in the capital gains account be offered as security for a loan?
No, money in a capital gains account can’t be offered as security for a loan.
Which form is needed to close a capital gains account?
The application to close a capital gains account must be made using Form F.
What happens to a capital gains account if its holder dies?
In case the account holder dies before the expiry of the time stipulated under Section 54, 54B, 54D, 54F and 54G, the depot account can neither be taxed in the hands of the deposit holder nor his/her legal heirs. This deposit is considered as part of the estate for the legal heir and not an income under the Income Tax laws.
Can I convert a capital gains savings account into a capital gains deposit account and vice versa?
Yes, transferring a capital gains savings account into a capital gains term deposit account and vice versa is allowed under the Capital Gains Account Scheme. You can do so by filling in Form B. However, the transfer from Type-B account to Type-A account before maturity will be treated as premature withdrawal, attracting penalty. You can also transfer your account from one branch to another branch of the same bank. Transfer of accounts from one bank to another bank is not possible.
Do I have to attach proof of capital gains deposit with ITR form to claim tax deduction?
No, attaching the documentary proof is not an option while filing the ITR. However, this proof must be kept to be produced in case the I-T department demands to see in future.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
