Ever experienced a situation where you sold property/land and wanted to save taxes on it? You’ve probably already heard of Sections 54 and 54F. These sections of the Income Tax Act help you save taxes on long-term capital gains made via a sale of residential property/capital assets respectively. Basically, you’d need to re-invest these gains into a new residential property to save taxes on them.  

But realistically, you may run into trouble if you can’t find another residential property to buy within the timeline given to claim the benefits of Sections 54 or 54F. This is where the Capital Gains Accounts Scheme comes into play.

What is Capital Gains Account Scheme?

Capital Gains Account Scheme (CGAS) was introduced for people to park their unrealized capital gains in an account with one of the 28 banks notified by the government. They can park their funds here until they can make appropriate investment to claim capital gains exemptions. 

Please note the gains must be deposited into CGAS account before filing returns for that financial year.

Also Read: How is income from Mutual Funds taxed in 2024?

Two types of accounts can be opened under Capital Gains Account Scheme

1) Type A – Savings Deposit: Type A account closely resembles a standard savings bank account from any financial institution, receiving periodic interest payments comparable to those of a regular savings account. 

You will also receive a passbook that records all transactions such as deposits, interest earned and withdrawals made. You will also enjoy high liquidity, meaning you can withdraw funds easily and at any time. 

2) Type B – Term Deposit: Type B account is similar to a fixed deposit account. The Type B account has a maximum allowable term of 3 years. Just like an FD, if you break it before maturity, a premature withdrawal penalty will be levied. 

Depositors are obligated to select a term corresponding to their specific investment plans, such as opting for a two-year term in case of acquisition of new house property or a three-year term for construction purposes.

There are two options when it comes to earning interest on your deposits – cumulative deposit and a non-cumulative deposit. Cumulative deposit is where interest earned is added back to the principal, thereby compounding. On the other hand, in a non-cumulative deposit, you will receive regular interest payments either quarterly, half-yearly, or annually.

Also Read :- Do I have to Pay Capital Gain Taxes Below Rs. 5 Lakh If I Have No Income?

How to withdraw from Capital Gains Account Scheme? 

You will need to submit Form C to withdraw funds for the first time. These funds need to be utilized for purpose withdrawn, within 60 days of withdrawal. If there’s any unutilized amount, it needs to be immediately redeposited into Type A account.

For subsequent withdrawals, you will need to submit Form D. You will need to submit this along with details regarding the utilization of the previously withdrawn funds. 

Important pointers to remember 

• If you fail to utilize the funds parked in CGAS to make investments in the specified asset, within the specified time limit, then capital gain exemption will be withdrawn, and the gains will be taxable. 
• One cannot auto-renew CGAS deposits, unlike a normal FD. The interest rate is determined by RBI and updated regularly.   
• CGAS accounts do not come with a debit card or cheques. 
• CGAS can be utilized to park funds if one is planning to avail capital gains exemptions from Section 54 to Section 54GB, not just Section 54 and 54F.