What is it?
Capital Gain Account Scheme (CGS) is basically a vehicle through which certain investments to save long-term capital gains tax have to be routed in case the investments haven’t been made before the due date of filing tax returns. This also acts as a vehicle through which tax payment on long-term capital gains can be deferred.
The CGS account can be opened with a designated nationalized bank. It applies to all assessees eligible for exemption under sections 54, 54B, 54D, 54F or 54G of the Income-tax Act, 1961.
How it works
Say, a long-term capital gain comes your way but you aren’t able to invest it within the stipulated period to avoid paying long-term capital gains tax. In such a case, if you park the money in this account before the due date of filing your return, the claim for exemption or payment of capital gains tax may be postponed to a future date. However, at the end of the relevant time period, if you fail to invest the money in the relevant asset mentioned in the section under which this transaction falls, the money will be subjected to long-term capital gains tax.
Let’s say, you sell a property in April 2011. The capital gain made should be used to either buy a house by April 2013 or construct a house by 2014. Until then, you can deposit the money in a CGS account before the date of filing returns, which in this case would be 31 July 2012, to save tax. If you do not acquire the new property till April 2014, the long-term capital gains would be taxable in the financial year 2014-15.
Types of account
There are two types of CGS accounts. Account A is like a savings account from which withdrawals can be made from time to time. The interest is paid at the banks’ savings account rate. Account B is like a term deposit with two options—cumulative (interest reinvested) or non-cumulative (quarterly withdrawal). The interest rate is generally fixed by the bank and is either on a par with other term deposits or slightly lower.
You can transfer the account from one branch of a bank to another. Also, you can transfer your account from account A to B and vice-versa of the same bank if opened under the same provision. After the conversion of the account, interest would start accruing from the date of opening the new account.
The interest income on these accounts is taxable. Also, for two capital gains made by selling two asset classes, which qualify under different sections mentioned above, you will have to open two different accounts to save tax on both. Also, capital gains made in one asset class cannot be invested in another asset class for claiming tax benefit.
You can withdraw up to Rs 25,000 in cash, any amount above this limit will be issued in the form of a crossed demand draft. The amount has to be utilized within 60 days of withdrawal. These deposits cannot be used as guarantee to avail other loans.