All you need to know about Capital Gain Account Scheme
Section 54 of the Income Tax Act provides an exemption from tax on long-term capital gains arising out of the 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. It may be difficult to arrive at a purchase or construction decision before filing the tax return for the year in which the sale took place. However, the assessee can avail exemption by depositing the capital gain in an account opened under the Capital Gain Account Scheme (CGAS).
The CGAS account can be opened only with an authorized/approved bank branch. Rural branches of banks are not included.
Types of Capital Gains Account Scheme:
Capital gains account come in 2 categories: Savings and Term Deposit.
CGAS Type A – Savings Account:
A capital gains savings account is similar to the regular savings account in any bank. The applicable interest rate is also the same as that given on regular saving schemes. You will receive a passbook that has records of all transactions – deposits, interest received, withdrawals – made in the account. The amount deposited in this account will have high liquidity and can be withdrawn any time.
CGAS Type B – Term Deposit Account:
A capital gains term deposit account is similar to the fixed deposit schemes of banks. The rate of interest and terms surrounding withdrawal before maturity also remain the same as the bank’s FD scheme. So if you withdraw the amount in this account before the end of the tenure that you agreed with the bank you may have to pay premature withdrawal penalty, depending on the terms of the bank. You will receive a deposit receipt that specifies the principal deposited, date of deposit, date of maturity and the interest rate. This account also offers cumulative and non-cumulative options. In the cumulative option, the interest amount is added to the term deposit and reinvested, thereby adding to the total interest accrued. The non-cumulative scheme, on the other hand, allows you to withdraw or receive the interest at regular intervals – quarterly, half-yearly or annually.
The tenure of a Type B account is a maximum of 36 months (3 years) if you are constructing a house, and 24 months (2 years) if you plan to buy a ready house. The capital gains term deposit account is recommended only if the capital gains are available in a lump sum. You could place the amount in a capital gains term deposit scheme for a period of fewer than 2 years so that you can make the required investment before the end of 2 years by which such an investment should be made to get an exemption on capital gains tax. This way, you can benefit from the interest accrued on the term deposit.