By Chetan Chandak
Whenever you transfer or sell a house property, you receive a lump sum amount in the form of sale proceeds. If the consideration received is more than its cost (indexed cost in case of long-term capital asset), then such excess amount is considered as capital gains. Such gains attract tax known as capital gains tax. Subject to a few exceptions (viz. listed share) if you sell the capital asset after holding it for at least three years, then the gains will be termed as long-term capital gains (LTCG), else it will be treated as short-term capital gains (STCG).
Unlisted foreign share qualifies as long term if you hold for more than 2 years. Further, starting 1st April 2017 holding period for an immovable property has been reduced from existing 3 years to 2 years to be treated as long term. Generally, LTCG is taxed at 20% with indexation whereas STCG is taxed at income slab rate.
The twist here is, you can avail tax exemption on long-term capital gains under various sections of the IT Act viz. 54, 54F, 54EC, etc. If you decide to avail any of the exemption under the above provisions, then you need to re-invest the sale proceeds in the specified assets (viz. House property, agricultural land, specified securities).
This amount needs to be invested within the specified period of 2 / 3 years (6 months in the case of 54EC bonds) as the case may be. But purchasing or constructing an immovable property is not a quick decision and may take substantial time. In this case, if you are not able to invest the amount of capital gain or the sale proceeds as the case may be before the due date of filing a tax return (usually 31 July), the tax department wants you to deposit the unutilized amount in a separate account called Capital Gain Account Scheme – CGAS.
CGAS safeguards your long-term capital gains from tax if you fail to re-invest the capital gain in the specified assets before the due date of filing a tax return. Once you deposit the amount in CGAS, you can use it for the purchase or construction of the eligible asset with the time allowed.
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The CGAS account can be opened only with an authorised bank branch. The glitch is rural branches of banks are not approved to open this account. You can make deposits in this account either in lumpsum or in installments at any time.
Under this scheme there are two types of accounts – Account A (similar to savings account) and Account B (similar to term deposit). Account A offers flexible withdrawals and interest rate is similar to what banks offer on regular savings account, whereas Account B offers higher rate of interest but then withdrawal is not flexible. The interest earned on the deposit amount will be taxable in your hands.
If you wish to withdraw frequently, then you should go for Account A and if you plan to invest in a property after a year or so then you should better open Account B. If you know the exact payment schedule according to which you will have to pay the amount to your builder, you can make several Type-B small term deposits (if permitted by the banker) with different maturity date, as per your payment schedule. This will help you in maximising your return.
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Further, you should keep in mind that the amount deposited in CGAS can only be used to buy or construct a new asset. While making an initial withdrawal, you have to submit an application mentioning the purpose. For subsequent withdrawals, you can fill up specified forms mentioning details of utilisation of earlier withdrawals. Make sure you keep the bills for purchase of raw material, payment made to contractor or builder, etc. handy so that you can produce it before bank authorities if needed. Also, the money that you withdraw should be used within 60 days of withdrawal.
If you wish to close your account, you will have to make an application with the approval of the Assessing Officer under whose jurisdiction you come to the deposit office.
If the money deposited by you, in the CGAS, on which you have claimed exemption under Section 54/54F is not used within the specified period for either purchase or construction of a residential house, then that money will be taxed as income from long-term capital gains of the year in which the specified period of 2 years / 3 years gets over.
Do note that when you file your income tax returns, you will need to furnish a proof of your CGAS bank account to avail tax exemption.
(The author is Head of Tax Research, H&R Block India)