The Indian government instituted the Capital Gains Account Scheme (CGAS) to encourage investors to reinvest their capital gains made in the market in different avenues. The scheme gives tax benefits to investors who invest their capital gains into specified assets (accounts) provided under the CGAS. The plan is listed under sections 54 to 54GB of the Income Tax Act 1962, which has provisions for exemption from capital gains.
In some cases, taxpayers are unable to reinvest the capital gains in modes specified in the law before the filing of return of income or before the end date of profits investment. Thus, the government introduced the Capital Gains Account Scheme to enable taxpayers to park their funds till they are spent on the prescribed plan.
What is Capital Gains Tax (CGT)?
Earnings generated from the sale of capital assets are termed capital gains. Gains from the trade of capital assets are taxed in the income tax proceedings. Capital gains arise for a transaction where you trade the asset for a higher price than its buy price.
Types of Capital Gains Tax
Capital assets are generally divided into short-term and long-term capital assets.
- Long-term Capital Asset
Long-term capital assets are the assets that are held for more than 12 months. In India, the tax for long-term capital gains in stock markets is set at 10% of the profit volume.
- Short-term Capital Asset
Short-term capital assets are the assets that are held for 12 months or less. These gains are taxed at 15% in stock market gains.
Capital Gains Account Scheme
The time available for the beneficiary to reinvest and avail of the exemption is longer than the due date to register the return of assets. In this case, the taxpayer can deduct unused capital gains in the “Capital Gain Account” under the Capital Gains Account Scheme. Capital gains invested in the capital gains account are exempt from taxation and are treated as reinvested gains.
Availing Capital Gains Account Scheme benefits
Taxpayers who are unable to reinvest their investment income in a particular tax-exempted avenue before filing tax returns are eligible for CGAS. Before reporting it in income tax filings, taxpayers must bring in the investment income that was not used for re-investment purposes. This must be done before the tax filing deadline. Capital gains account can be opened for additional capital benefits at any branch of a public bank, except in rural areas where banks are not empowered with such features.
Procedure to open capital gains account
You can open a capital gains account with your bank and apply via Form A. Information such as PAN details, proof of address, and photograph is required for the opening process. You can make deposits in many ways, such as cash, check, demand draft, etc. You can make the deposit either in lump sum or instalments. Separate applications shall be made for exemption under different sections, and you must open individual capital gains accounts.
Types of deposits
You can make two types of deposits under the capital gains account scheme.
Type A – Savings deposit
Type A account is like a regular savings bank account of any bank where interest at a rate similar to saving bank account interest is credited periodically. The bank also issues a passbook to the deposit holder. Like the savings deposit, a Type A account offers better liquidity, and you can withdraw at any time.
Type B – Term deposit
Type B account is similar to a bank’s fixed deposit account that offers interest at the rate applicable to a term deposit. It has restrictions identical to a term deposit. The maximum term allowed for a Type B account is three years. The depositor is required to choose the time based on his plan for specified investment, such as two years for the purchase of new house property or three years for construction. Like fixed deposits, depositors receive a deposit certificate containing all the deposit details. It has to be tendered at the time of withdrawal. Moreover, auto-renewal of term deposit is not permissible as a standard fixed deposit.
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The term deposit can be calculated on a cumulative or non-cumulative basis; interest is either consolidated and reinvested with the principal or paid out periodically.
Withdrawal from the scheme
You shall submit form C for withdrawal from an account for the first time and Form D for further withdrawal transactions. These are subject to furnishing the details of the manner of utilisation of money withdrawn previously. Hence, no debit card or chequebook is issued to the depositor.
There are no restrictions on using the Type-A account for withdrawing money. While the right to withdraw money from a Type-B account is granted, it is only allowed if the money is transferred to a Type-A account and then withdrawn. Failing to adhere to this rule levies penalty on the account holder. The individual amount withdrawn is expected to be utilised for designated purchase within 60 days of withdrawal, and any unutilised amount may be re-deposited to the Type A account immediately.
