Capital Gains Accounts Scheme (CGAS) - Meaning, Features and Types

Written by : Knowledge Centre Team

2024-08-02

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You built a house, in your native town, at the age 30 of (say, in the year 2007) by investing approximately Rs.15Lakhs and now at the age of 45, you are considering selling the property to upgrade to a bigger and better place. Your property now commands a market price of ~Rs.1.5 Crore, given the rising demand for the property after the city witnessed a spurt in corporate investments. Industrial growth resulted in employment creation and an increase in migration from far and wide.

When you sell your property at a higher price, you are liable to pay Long Term Capital Gains Tax (LTCGT). An LTCGT of 20% is applicable for any sale of property or asset that was owned for Twenty four month in case of immovable property. 12 months in case of securities and 36 months on other assets. LTCG can significantly increase your tax outflow for the financial year.

What is Capital Gains Account?

A capital gains account can be opened in any of the banks that are notified by the Reserve Bank of India (RBI) to offer such a facility. A capital gains account can be used to park unutilized/underutilized funds, received from the sale of an asset to avail exemption from LTCGT.

Which Capital Gains can you Deposit in Capital Gains Account?

Gains made by selling/transferring immovable or financial assets can be deposited in the capital gains account. The different categories and relevant sections of the Income Tax Act are tabulated below:

Section	Taxpayer	Capital Gain On
54	HUF or Individual	Sale of a residential house
54B	HUF or Individual	Sale of agricultural land
54D	Any	Acquisition of building and land
54E	Any	Sale of any long-term capital asset
54F	HUF or Individual	Sale of a long-term capital asset that is not a residential property
54G	Any	Transfer of capital assets
54GA	Any	Transfer of capital assets to a Special Economic Zone (SEZ)
54GB	Any	Transfer of residential property
54EC	Any	Transfer of long-term capital assets

Types of Capital Gains Account

You can save your capital gain using two types of capital gains accounts:

a) Savings
b) Term Deposit

A capital gains savings account functions very similarly to a regular savings account and attracts the same rate of interest as well.

A term deposit account draws a parallel with the standard fixed deposit options offered by banks. The terms and conditions pertaining to pre-mature withdrawal, rate of interest, nomination etc also remain the same.

Who can Invest in Capital Gains Account?

If you are a taxpayer and have made capital gains, by selling an asset, under sections 54 to 54F of the Indian Income Tax Act 1961, you are eligible to open a capital gains account. Reinvesting the capital gains within the specified time limit is essential to save on LTCGT.

However, in case you think you will not be able to re-invest within the stipulated time frame, you can deposit the capital gains or the unutilized amount into the capital gains account. However, you must do this before filing your income tax returns and should not be done after the due date for filing income tax returns.

How is LTCGT Calculated?

Long-term capital gain = Final Sale Price – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where:

Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement.

For example,

If Cost Inflation Index, CII = Index for financial year 2021-2022/Index for financial year 2007-2008 = 1024/480 = 2.13

Indexed cost of purchase = CII x Purchase Price
= 2.13 x Rs. 15,00,000 = Rs. 31,95,000

Long term capital gain = Selling price - Indexed cost
= Rs. 1,50,00,000 - Rs. 31,95,000 = Rs. 1,18,05,000

Tax on Capital Gain = 20% of Rs. 1,18,05,000 = Rs. 23,61,000

How to Save or Postpone Capital Gains Tax?

You can save on the tax liability by investing, the gains made in the transaction, in a residential property. If you have made capital gains from the sale of a residential house, you will claim an exemption under section 54 if you invest the gains in a residential property. If you gained from the sale of any asset other than a residential house, you must claim an exemption under section 54F when you invest the gains in a residential property.

There is another option as well to invest the capital gains and still save on taxes. You can consider investing in capital gains bonds and claim an exemption under section 54EC. The bonds offered by Rural Electrification Corporation (REC) Limited and National Highways Authority of India (NHAI) are for a tenure of three years and can be used to invest a maximum of Rs.50lakhs in a given financial year. In either case, you must invest within six months of the sale of the property.

Tax Exemption: Section 54 Vs Section 54F

Section 54	Section 54F
LTCG on the sale of a residential property	LTCG on the sale of an asset other than a residential property
Only the indexed LTCG to be invested	Only the net consideration of assets should be invested.
-	Should not own more than one house in addition to the one being purchased or constructed.

Long Term Investment with Tax-Exempt Capital Gains

Here are a few long-term investment options that come built-in with exemption from capital gains at the time of withdrawal or maturity. The investments are also deductible under various sections of the Income Tax Act.

1. Public Provident Fund (PPF)

PPF investments can be deducted, under section 80C, from taxable income, thus reducing the net taxable income. The maximum permissible investment in PPF is Rs. 1.5 lakhs and that is also the upper limit of investments made under section 80C. There is no Tax Deduction at Source for PPF and withdrawals, at permitted intervals, are also tax-free. The interest accrued on PPF is not taxable.

2. National Pension Scheme (NPS)

Investment of up to Rs. 50,000 in NPS Tier 1 account is deductible, under section 80CCD (1B), from taxable income. Rs. 1.5 Lakhs invested in NPS can be deducted, under section 80C, from taxable income. The Assesses can invest in more than one class of specified investments and claim deduction up to Rs. 1.5L combined. Therefore, a total of Rs. 2 Lakhs can be deducted to compute taxable income. The corpus that can be withdrawn at maturity is exempted from tax.

3. Unit Linked Insurance Plans (ULIPs)

Financial planning is a two-phased strategy, wealth creation in the initial phase and wealth conservation later as you traverse through the journey of life. Invest 4G from Canara HSBC Life Insurance Company helps you do exactly that.

a) The amount paid as premiums are deductible, under section 80C, from taxable income.
b) Withdrawals from the plan after five years of holding are exempt, under section 10(10D), from tax.
c) You can continue the plan up to 99 years of age.
d) The plan offers a systematic withdrawal option. So, you can build your retirement corpus and draw a pension out of it under the same investment plan.
e) Invest aggressively and manage your portfolio with automated strategies, even when you are not looking at the market.
f) Keep your total annual investments in ULIPs below Rs 2.5 lakhs to ensure that maturity value remains free from capital gains tax.

4. Life Insurance Savings Plans

Life is a journey with a specific set of milestones at periodic intervals. You may need money at these milestones to achieve your life goals such as buying a house or funding your child’s education. Guaranteed Savings Plan is adept because you invest only for a defined period and get returns in the form of guaranteed pay outs for the rest of the term. Money paid or withdrawn from this life insurance cum savings plan is exempt from taxes.

Gains made by selling properties are generally higher and as a result, the tax levied is also higher. Saving tax by reinvesting the gains in properties or financial assets that give exemptions on investment, withdrawal and interest is the smartest way to save money.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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