How to make the most of Capital Gains Account Scheme?

Adhil ShettyBankBazaar.comReal estate returns are often handsome and come in lump sums, but often there is a twist to the story. The profit arising from the sale proceeds is considered capital gains, and is taxable. Many property investors who get one-time lump sum returns from their real estate investments often do not know their tax obligations or how to optimize their tax outgo.One way out is Section 54 of the Income Tax Act of India. This section offers tax exemption for capital gains if you use the funds to purchase another property or for construction of a house within certain specified period—a maximum three years. Specified bonds also provide tax exemption from capital gains.However, imagine a scenario where you are unable to find a property worth buying within this short timeframe, or the property you shortlisted would be ready only after the specified time period.In such cases, a little-known scheme called the Capital Gains Account Scheme (CGAS) can come to your aid. You can park your funds under the scheme and avail tax deductions. An overview of the Capital Gains Account SchemeThe Capital Gains Account Scheme (CGAS) was initiated by the government in 1988 and is meant to help those who are not able to reinvest their real estate sale proceeds in a new residential property within the stipulated period.To avail benefits under the CGAS, you need to open a CGAS savings account and deposit the entire sum of proceeds from your sale. Not all bank branches offer CGAS accounts—only those approved by RBI offer such a facility. CGAS accounts are not offered by rural branches of banks. Types of CGAS accounts: Under the Capital Gains Account Scheme, you have the option to choose between two different account types. These include:•Type A – CGAS Savings Account: This type of CGAS savings account is just like any other bank saving account. You will get the same rate of interest on your funds as you get for a normal bank savings account, and you can withdraw funds from it as lump sum or periodically, for purchase or construction of another property.•Type B – CGAS Term Deposit Account: The CGAS type B account is a term deposit account where your amount is locked for a period of 3 years, starting from the date of transfer. The interest rate for this account is similar to that offered on a fixed deposit account by the bank. On maturity, Type B account can be transferred to Type A. If you wish to withdraw money from a Type B account before maturity, it needs to be first transferred to a Type A account, to initiate the withdrawal. A penal charge of 1% is also applicable.Deposits to and withdrawals from CGAS accountYou will need to deposit the entire capital gain funds you receive from your property sale into the CGAS account to get tax exemption. You cannot open a CGAS account with partial sale withdrawals. You can open a CGAS bank account either by paying in cash, cheque or a demand draft as per your choice, and with KYC documents, as in the case of any other account opening.You can withdraw money from your CGAS account, but only when you need it for purchase of a property or construction of a house. To withdraw money, you will need to give a written application to the bank, giving details of the purpose of your fund requirements. You need to use the funds from your CGAS account within 60 days for your house purchase or towards construction.Whenever you file your income tax returns, you will need to furnish a proof of your CGAS bank account to get tax exemption. A proof should be attached along with your ITR form for each financial year.CGAS Scheme at a Glance• You need to furnish your KYC details to open a CGAS account.• You can choose between Type A or Type B account as per your needs.• The interest you earn from CGAS account is taxable under ‘Income from other sources’.• You cannot avail any loan facility on money parked in any CGAS account.• You can appoint nominee(s) to your CGAS account like a normal bank account.• For closing a CGAS account, an authority letter or certificate from an income tax officer within the jurisdiction is mandatory.It is important to note that if amount deposited in the CGAS is not reinvested in the purchase of a residential property within two years or for construction of the same within three years, it is subject to Long Terms Capital Gains Tax.