Capital Gains Account Scheme launched in 1988; is an account you can open with an authorized bank and deposit the money from long-term capital gains; which will be utilized for buying or building a house for availing the capital gains tax exemption U/S 54 or 54F of the Income Tax Act.
You can avoid tax on long-term capital gains by investing either the profit or sales proceeds in buying or building a residential property. However, if you are unable to buy or build a new house before the due date of filing income tax for the year of sale of a capital asset, you can invest the amount in a CGAS.
For example, you sell your house and earn a profit of Rs. 20 lakhs. U/S 54 you can get an exemption on capital gains tax by investing it in buying a house in 2 years of sale or building a house within 3 years of sale. But if you fail to do this before the due date of filing tax returns, you would be liable to pay tax in the same AY and can claim the refund after actual utilization of the money. However, to avoid this, you can deposit the amount in CGAS.
If after claiming the exemption U/S 54, an individual sells a new house before a period of 3 years from the date of its purchase/completion of construction. If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.
If the taxpayer has not used the amount deposited in the CGAS in respect of which he has claimed the exemption U/S 54 within the specified period; then the unutilized amount will be taxed as income by way of long-term capital gains of the year, in which the specified period of 2/3 years gets over.
There are two types of Capital Gain Accounts: Type 1 & Type 2. Type 1 is like your savings account and Type 2 is like a fixed deposit/term account. You can change the nature of the account. However, interest is not exempted under the income tax act. It is chargeable as per the income tax slab rates. For this account, you will not get chequebook and so, you have to use forms to withdraw money. However, a passbook is issued.
You can open a capital gains account by filling in and submitting Form A along with proof of address, PAN copy, and photograph.
Further remember that, you will need to deposit the entire capital gain funds you receive from your property sale into the CGAS account to get tax exemption. You cannot open a CGAS account with partial sale withdrawals. Further, you can open a CGAS bank account either by paying in cash, cheque or a demand draft as per your choice, and with KYC documents, as in the case of any other account opening.
You can withdraw money from your CGAS account, but only when you need it for the purchase of a property or construction of a house. To withdraw money, you will need to submit a duly filled Form C to the bank, giving details of the purpose of your fund requirements. You need to use the funds from your CGAS account within 60 days for your house purchase or towards construction.
Whenever you file your income tax returns, you will need to furnish a proof of your CGAS bank account to get tax exemption. You should attach a proof along with your ITR form for each financial year.
The Government nominated these 28 banks for this purpose. They are;
For closing CGAS, you need to submit an application at the bank in Form G along with passbook or receipt. Income tax officer must approve your application, and only then the bank will close your account. You must remember that in the year, you close the account (or when 3 years are elapsed, whichever is earlier); you would have to pay Capital Gains Tax for the entire amount in the account.