This article is about Capital Gain Deposit Account Scheme for Long Term Capital Gains on Property
Capital Gain Deposit Account Scheme is applicable for taxpayers who would like to purchase a new property to claim exemption u/s 54. In layman terms, if you have sold a property and long term capital gain is arising from the transaction. You can retain the capital gain in your Savings Account till the date of filing the Income Tax Return or till the due date of ITR filing. The last date of filing ITR is for the financial year in which capital gain arises. Normally, the due date of filing Income Tax return is July 31 for the previous Financial Year. Under extraordinary circumstances, it can be extended by the Finance Ministry.
As per the income tax act, the taxpayer has a time period of two years to purchase a new house from the date of transfer of old house. Alternatively, i can construct a new house within three years from the date of transfer. In such cases, i cannot keep the capital gain in savings account beyond a specific period i.e. last date of filing of ITR for the FY in which the capital gain arises. For example, if you sold the property on 1st May 2015 then you can keep capital gain in your savings account till 31st July 2016, not 31st July 2015.
Before we proceed, let me address the dilemma of a taxpayer based on my experience with the readers and clients. Let me admit the majority of them are confused whether to purchase a new property or buy capital gains bond. Because of this confusion, some of my clients paid a heavy price. They were not able to decide between property and capital gains bond within 6 months from the date of transfer of old property. Now, why 6 months is crucial because they lost the opportunity to invest in capital gains bond to save long term capital gain. The reason being, u/s 54EC if you have decided to invest in capital gains bonds of NHAI and REC then you have only 6 months from the date of transfer of old property. Therefore, from income tax perspective you should be 1000% sure how you are going to save capital gain. Any confusion or dilemma can cost you lacs and millions. I will discuss capital gains bond in my next post. Let’s check and understand the points discussed till now with an example.
Let say, i sold residential property on Oct 20, 2015. In this case, to save long term capital gain tax, i can invest in capital gains bond within 6 months i.e. on or before April 20, 2016. Alternatively, assuming i decided to invest the capital gain in the property. In this case, i should either invest LTCG in new property or deposit in Capital Gain Deposit Account Scheme on or before 31st July 2016. Let say the last date of filing Income Tax Return is 31st July 2016 and will not be extended. In case i have utilized the part of capital gain for the purchase of new property then the balance should be deposited in Capital Gain Deposit Account Scheme. Please note that if you deposit the capital gain not utilized after 31st July 2016 then this amount will not be eligible for exemption u/s 54 under any circumstances. You need to pay LTCG tax on this amount.
What is Capital Gain Deposit Account Scheme?
In layman term, Capital Gain Deposit Account is a separate account. The taxpayer can temporarily park the capital gain amount earmarked for the purchase/construction of new property in this account. It will help the income tax department to identify that you intend to invest the amount deposited in Capital Gain Deposit Account to purchase/construct a property. You can deposit the capital gain through Cheque/Cash/DD/Banker’s cheque. The date of deposit of cheque/DD/Banker’s cheque will be considered as the date of deposit of capital gain in Capital Gain Deposit Account. It is true even if the cheque/DD/Banker’s cheque is handed over along with account opening form. Normally, there is a dispute on this point between the depositor and the bank, therefore, i clarified. You can also deposit the capital gain in installments. At the time of account opening, you need to declare whether you are buying a property or constructing the same. The maximum period of deposit is 24 months if you are buying. In the case of construction, a max period of deposit is 36 months as the case may be.
Now you must be wondering, why a separate account. The reason being, if you are planning to purchase a new property from capital gain then you can claim the exemption at the time of filing ITR. There is a possibility that either whole or part of the capital gain is not utilized. The buyer has time till 2/3 years to invest capital gain from the date of sale of the old property. An income tax department cannot keep track of this amount if it is deposited in a savings account. Therefore, Capital Gain Deposit Account Scheme was launched to park this money in the separate account. You can withdraw money from this account to purchase/construct new property. Please note you can claim exemption u/s 54 only after depositing the capital gain not utilized in Capital Gain Deposit Account. The exemption can be reversed or withdrawn if the capital gain is not utilized within specified period.
Capital Gain Deposit Account can be opened in any of the 25 Public Sector Banks except their rural branches. The list of banks is as follows
State Bank of India
State Bank of Patiala
State Bank of Bikaner & Jaipur
State Bank of Travancore
State Bank of Hyderabad
State Bank of Mysore
Bank of Baroda
Bank of India
Punjab & Sind Bank
Bank of Maharashtra
Central Bank of India
Indian Overseas Bank
Punjab National Bank
Oriental Bank of Commerce
Union Bank of India
United Bank of India
Types of Capital Gain Deposit Account
There is a big dilemma among taxpayer which type of deposit account they should open. There are two types of accounts i.e. Deposit Account A and Deposit Account B. In simple language, Deposit Account A is like your savings account and Deposit Account B is similar to Fixed Deposit/Term Deposit. You will receive interest equivalent to savings account interest on Account A i.e. 4% p.a. Similarly, an interest rate of Account B is same as Fixed Deposit Interest rate depending on the maturity. To open an account, you need Form A and for the nomination, you can use form E. To change a nomination, use Form F.
How to select the type of deposit account? The answer is very simple, it depends on when you will need money to purchase/construct the new property. If you are sure that you will finalize the new property only after specific period then you should opt for Deposit Account B. On the other hand, if your installment of the new property/construction is due at regular intervals then open Deposit Account A. Similar to Fixed Deposit, in Deposit Account B, you have an option to re-invest the interest (cumulative). Alternatively, you can opt for a quarterly payout of interest (non-cumulative). There is a penalty of 1% for the premature withdrawal of Deposit Account B. The interest is taxable under Capital Gain Deposit Account Scheme. Depending on your requirement you can transfer/opt for both types i.e. Account A and Account B through Form B. Out of total capital gain, X% can be deposited in Account A and balance in Account B.
Withdrawal from Capital Gain Deposit Account
Withdrawal is a slightly complex process. You cannot withdraw money freely from Capital Gains Account. You need to submit an application. The amount withdrawn should be utilized for intended purpose within 60 days from the date of withdrawal. Depending on the withdrawal amount, a bank may not hand over the amount to you. Bank may issue Banker’s cheque in the name of the seller. The first withdrawal is through Form C and subsequent withdrawals are through Form D. You cannot use this amount for any other purpose except purchase/construction of new property. If you are not able to utilize the withdrawal within 60 days then you should deposit it back in Capital Gain Deposit Account.
You will not get Debit Card/Cheque Book/Net Banking Transfer facility for Capital Gain Deposit Account. There are a lot of other nitty gritty to operate the account. Lastly, to close the Capital Gain Deposit Account, you need the approval of your AO (Assessing Officer). He should be satisfied that you have invested 100% exempted amount to purchase/construct new property. For closure, you need to fill form G. In case of closure of account due to death of the account holder, the legal heirs can claim the deposit through Form H.
Lastly, if the amount not utilized remain in the Capital Gain Deposit Account Scheme even after a specified period of 2/3 years. In short, either taxpayer is not able to finalize the property or provisioned extra amount for property purchase. The 100% of the amount not utilized will be taxed as long term capital for the financial year in which the specific period gets over. In the example mentioned above, i sold the property on 20th Oct 2015. If i am not able to purchase a new property till 19th Oct 2017 or construct a new house till 19th Oct 2018. In this case, the exemption claimed by me for FY 2015-16 will be withdrawn. I need to pay long term capital gain tax during FY 2018-19 on the partial or whole amount that is not utilized.
If you withdraw the amount from Capital Gain Deposit Account Scheme and utilize for any other purpose except purchase/construction of new house. In this case also, you need to pay LTCG tax in FY of withdrawal.
I tried to cover all the important aspects of the capital gain deposit account in layman terms. Hope you liked the post.
The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that we are not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. CA Mitesh and Associates is India's leading Taxation Firm which is committed to helping people navigate complex tax laws and banking regulations. Our main aim is to assist the individuals with applicable laws & regulations compliance and providing support at each & every level to make sure that they stay compliant and grow continuously. For any query, help or feedback you may get in touch here - Appointment with CA