Capital Gains Account Scheme (CGAS)

The Capital Gains Account Scheme (CGAS) is a financial mechanism introduced by the Government of India in 1988 under the Income Tax Act, 1961 to facilitate taxpayers in claiming exemptions on capital gains, particularly when immediate reinvestment of the gains is not feasible. It allows individuals, Hindu Undivided Families (HUFs), and other eligible taxpayers to temporarily park their capital gains in a designated account until they are utilised for specified reinvestment purposes, such as purchasing or constructing a new residential property or investing in eligible assets.

Background and Purpose

Capital gains arise when a capital asset, such as land, building, shares, or jewellery, is sold at a profit. Under the Income Tax Act, certain sections (such as Sections 54, 54B, 54D, 54EC, 54F, and 54G) allow exemptions from capital gains tax if the proceeds are reinvested in prescribed assets within a specified time.
However, in many cases, taxpayers are unable to reinvest the capital gains before the due date of filing their income tax return. To ensure that genuine taxpayers do not lose the exemption due to time constraints, the government established the Capital Gains Account Scheme (CGAS), 1988. The scheme provides a structured way to deposit unutilised capital gains until they are reinvested, thereby preserving the taxpayer’s eligibility for exemption.

Legal Framework

The scheme operates under the provisions of the Income Tax Act, 1961 and is governed by the Capital Gains Accounts Scheme, 1988, notified by the Central Board of Direct Taxes (CBDT). The accounts are maintained by authorised public sector banks, such as State Bank of India, Bank of Baroda, Punjab National Bank, and other specified institutions, under the supervision of the Ministry of Finance.

Eligibility

The following entities can open an account under the CGAS:

• Individual taxpayers
• Hindu Undivided Families (HUFs)
• Partnership firms, companies, and associations of persons (in some eligible cases depending on the section invoked)

The depositor must have earned long-term or short-term capital gains that qualify for exemption under relevant sections of the Income Tax Act and intend to reinvest them within the statutory timelines.

Types of Accounts under CGAS

The scheme provides two distinct types of accounts to cater to different investment needs:
1. Account Type A (Savings Deposit Account):

• Functions like a regular savings bank account.
• Interest is payable at the rate applicable to savings deposits.
• The depositor can withdraw funds periodically for investment purposes.
• Suitable when the taxpayer intends to make payments in stages, such as during the construction of a house.

2. Account Type B (Term Deposit Account):

• Similar to a fixed deposit account with a specific maturity period.
• Interest is payable at rates applicable to term deposits.
• Premature withdrawal or transfer to Account A is permitted with approval.
• Useful when the taxpayer does not need immediate access to funds.

Depositors can opt for either account or a combination of both, depending on their reinvestment plan.

Operation and Procedure

The procedure for availing of the scheme is systematic and straightforward:

1. Opening the Account:
   • The taxpayer must open a CGAS account with an authorised bank before the due date of filing the income tax return for the relevant financial year.
   • Form A (application form) is submitted to the bank along with details of the amount to be deposited.
2. Depositing Capital Gains:
   • The unutilised portion of the capital gain is deposited into the account.
   • The deposit can be made in lump sum or in instalments.
3. Withdrawals:
   • Withdrawals from Account A can be made using Form C, specifying the purpose of withdrawal.
   • The withdrawn amount must be utilised within 60 days for the stated investment; any unspent portion must be redeposited using Form D.
4. Closure and Utilisation:
   • Once the amount is fully utilised for the intended investment, the account can be closed with approval from the Assessing Officer (AO) of the Income Tax Department.
   • Closure before full utilisation also requires AO’s authorisation.

Time Limits for Investment and Deposit

The exemption period varies according to the relevant section of the Income Tax Act. Examples include:

• Section 54: For individuals/HUFs selling residential property — the amount must be reinvested in a new house within 2 years (for purchase) or 3 years (for construction).
• Section 54F: For reinvestment of sale proceeds from any long-term asset into a residential house — same timeline as Section 54.
• Section 54EC: Investment in specified bonds (such as NHAI or REC) within 6 months of transfer.

If the taxpayer cannot reinvest before the due date of filing the return (typically 31 July of the assessment year), the unutilised gains must be deposited into CGAS to retain the exemption eligibility.

Interest, Taxation, and Withdrawal Rules

• Interest earned on CGAS deposits is taxable as “Income from Other Sources” in the year of accrual.
• Tax Deducted at Source (TDS) may apply on interest, as per standard banking rules.
• The capital gain remains exempt only if the deposited amount is eventually utilised within the prescribed period.
• If the amount is not utilised within the specified time, it becomes taxable as capital gains in the year in which the deadline expires.

Example Scenario

Suppose an individual sells a residential property in April 2024 and earns a long-term capital gain of ₹40 lakh. If the individual intends to purchase a new house but cannot do so before 31 July 2025 (the return filing due date), they must deposit the unutilised ₹40 lakh into a CGAS account before that date. The amount will then be eligible for exemption under Section 54, provided it is used for the purchase or construction of a house within the next 2–3 years.

Advantages of CGAS

• Ensures Tax Compliance: Allows taxpayers to retain eligibility for capital gains exemption despite delayed investment.
• Flexible Options: Offers savings and term deposit variants based on investment needs.
• Wide Accessibility: Available through most public sector banks across India.
• Transparency: The scheme operates under a structured format with defined forms and approvals.

Limitations and Challenges

• Rigid Usage Conditions: Withdrawals require specific declarations and must be used strictly for stated purposes.
• Limited Banking Options: Only select authorised banks are permitted to offer CGAS accounts, excluding rural or private banks.
• Taxability of Unused Funds: Unutilised deposits after the permissible period automatically become taxable.
• Interest Rates: The interest offered is relatively low, similar to standard savings or fixed deposit accounts.

Closure and Compliance

The CGAS account can be closed only with written approval from the Assessing Officer after verifying that the funds have been utilised according to the applicable section’s conditions. In case of the depositor’s death, the legal heir can withdraw or close the account upon producing relevant documents and approval from the Income Tax Department.

Significance

The Capital Gains Account Scheme is an essential instrument for tax planning and compliance in India. It provides taxpayers with flexibility and ensures that genuine reinvestment intentions are not penalised by rigid timelines. By enabling temporary parking of capital gains, the scheme promotes structured reinvestment in assets such as housing and infrastructure, aligning with broader economic goals of capital formation and sustainable asset development.