CAPITAL GAINS ACCOUNT SCHEME (CGAS): save capital gain tax

The booming real estate market meant that Kapil Kumar would manage to sell his house in Pune for a neat profit. He had bought the place 10...

The booming real estate market meant that Kapil Kumar would manage to sell his house in Pune for a neat profit. He had bought the place 10 years ago with the idea that one day he would retire and also move out of Mumbai. However, 10 years on, the price that he was getting for his house was something that he hadn’t even dreamt of. Wanting to make hay while the sun shines, the deal had been completed in a record time. The only hitch that remained was the capital gains tax. Neat profit meant neater tax and he was thinking of ways of saving it. 

He had heard that investing the profit back in real estate does save tax. However, he didn’t want to buy in the current market. A visit to his Chartered Accountant (CA) was warranted. Maybe, he could find a way out.He did!

Kapil learnt from his CA that the Income Tax Act exempts the capital gains from the sale of a house if the taxpayer invests within two years from the date of sale or constructs another house within three years from the

date of sale. If the entire capital gain is not used, proportionate deduction is available.

Now Kapil has two years to buy the new house. However, what if by 31st July, which is the last date for filing the tax return, he hasn’t found the right property? How does he convey to the Income Tax office that he does indeed intend to buy a house within the time allotted to him and hence, will not be paying tax on the capital gains earned during the year? 

His CA advised him to keep the money in a special fixed deposit known as the Capital Gains Account Scheme (GGAS) in such cases.

Let’s assume Kapil earned longterm capital gains of `50 lakh. The tax at 20 per cent on this amount works out at `10 lakh (the 3 per cent education cess is ignored for ease of understanding). Seciton 54 offers him exemption from this tax if he purchases a house (costing R50 lakh) within two years or constructs one within three years.

Prior to 1988, Kapil would have been required to pay the tax in the financial year during which the capital gains arose, even if he intended to buy or construct a house. After purchasing or constructing a house within the stipulated time frame, he could pray for the refund. When he actually receives the refund depended upon

the strength of his prayers. Moreover, it was inconvenient for the Income Tax Office (ITO) to dig up the past records to check the veracity of the claim. 

Enter CGAS

Fortunately, the Tax Department was seized of this impractical approach. CGAS, introduced in 1988, eliminated the need to reopen the assessments for rectifications. Therefore, in effect, CGAS is a special account with banks or specified institutions to be used when the amount of capital gain is not utilised for the purchase or construction of the new asset before the due date of furnishing return of income. (Notification No. 724(E) dated 22 June 1988)

If the amount deposited is not utilised fully for purchase or construction of new asset within the stipulated period, then the amount not utilised will be treated as capital gain of the year, in which the period of three years from the date of sale of the original house expires. 

The salient features

1. There are two types of accounts;Type-A (savings deposit) andType-B (term deposit). Type-B can be either cumulative or noncumulative.Interest rates will be the same as those applicable to the normal savings and term bank deposits.
2. The effective date for claiming exemption will be the date on which the bank receives the application,subject to the realisation of cheque or draft. However, the interest will be payable from the date on which cash is paid or the cheque or draft is realised.
3. Amounts are freely transferable from Type-A to Type-B and vice versa. For premature transfers from Type-B to Type-A, the normal penalties will be applicable. 
4. Withdrawals can be made only from Type-A by submitting a declaration that the amount sought to be withdrawn is proposed to be utilised for the intended purpose. Where the amount sought to be withdrawn exceeds R25,000, the bank shall make payment by way of a crossed demand draft drawn in favour of the person to whom the depositor intends to make the payment. The amount withdrawn shall be utilised within 60 days. The unutilised portion, if any, shall be redeposited into CGAS. 

A lacunae 

That being said, there does exist some lacunae in this otherwise useful product. Let us see what these are:

1. CGAS does not allow any withdrawals, except for the specified purpose (of buying the house), even of interest. Moreover, the investor is required to pay tax on this interest (to which he has no access) on accrual basis out of his other income. 
2. Even if the sale is affected, in say the first month of the fiscal year  (say April ’11), the taxpayer may deposit the amount in CGAS on the last date for filing returns. In other words, he can freely utilise this money for 15 months (April ’11 to July ’12) as he likes. 
3. We have already discussed the fact that if the amount is not utilised wholly or partly for the desired purpose, within the specified period, the unutilised amount shall be treated as capital gains of the year during which the specified period expires. 

If this amount is to be treated as capital gain of that year, can the assessee purchase another house within two years or construct within three years? Can he use CGAS once again? 

It is illogical to do so and also the fact remains that this capital gain has not arisen out of sale of house, shares,

etc. Therefore, the answers to these questions are in the negative. However, experts believe that the taxpayer has got a right to set off carried forward capital losses against these gains.