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Capital Gain Account Scheme: Tax-Smart Real Estate Investment
Updated : February 28, 2024
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Capital Gain Account Scheme (CGAS)is a government scheme in India introduced in 1988 to help real estate investors reduce their tax liability on capital gains from property sales. Under this scheme, investors can deposit their capital gains into a special account and claim tax exemptions on the deposited amount.
The funds deposited can be utilised within a specified timeframe to purchase or construct a new property. The CGAS provides an opportunity for Indian real estate investors to maximise their profits while minimising tax obligations.
This blog post will provide an overview of the CGAS, including its definition, purpose, eligibility criteria, deposit limits, tax implications, and advantages compared to other investment options for capital gains.
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What is the Capital Gain Account Scheme?
Definition and Purpose of the Scheme
The Capital Gain Account Scheme (CGAS) is a scheme introduced by the Indian government to provide tax benefits to individuals on the capital gains they earn from the sale of assets such as property, stocks, and mutual funds. Under this scheme, individuals can open an account with a designated bank and deposit the capital gains earned from the sale of assets into that account.
This amount can then be used for specific purposes, such as purchasing or constructing a new property or investing in bonds or stocks. The scheme offers various benefits to taxpayers, such as reducing their tax liability and providing a safe investment option for their capital gains.
Eligibility Criteria for Opening a CGAS Account
To be eligible to open a CGAS account, an individual must have earned long-term capital gains from the sale of assets such as property, stocks, or mutual funds. The scheme is available to both residents and non-residents of India. However, non-residents can only open a Non-Resident Capital Gain Account (NRCGAS) instead of a CGAS account. To open a CGAS account, an individual must provide proof of the capital gains earned and the sale of the asset.
Comparison with Other Investment Options for Capital Gains
CGAS offers several advantages over other investment options available to taxpayers. Unlike other investment options, such as bonds or mutual funds, where the capital gains are subject to tax, the gains deposited into a CGAS account are tax-free. Moreover, the scheme allows individuals to deposit the entire amount of capital gains earned into the account, which can then be used for specific purposes such as purchasing a new property or investing in bonds or stocks. Additionally, the scheme provides a safe investment option for capital gains, unlike other investment options which may carry a higher level of risk.
Capital Gain Account Scheme 1988: Key Provisions
Provisions Related to Deposit Limits and Withdrawals
Under the Capital Gain Account Scheme 1988, there are specific provisions related to deposit limits and withdrawals. The scheme allows individuals to deposit the entire amount of capital gains earned into the account. However, there is a limit on the amount that can be withdrawn from the account. The limit for withdrawals from the account is 60% of the total balance in the account. Additionally, the scheme requires individuals to maintain a minimum balance of INR 50,000 in the account at all times.
Tax Implications and Exemptions for CGAS Account Holders
CGAS account holders are eligible for various tax exemptions and benefits. The gains deposited into a CGAS account are not subject to tax, and individuals can claim a tax exemption for the amount deposited into the account.
The scheme also allows individuals to use the funds deposited in the account for specific purposes such as purchasing or constructing a new property or investing in bonds or stocks, which can also provide tax benefits.
Differences between CGAS and Non-Resident Ordinary (NRO) Accounts
Non-resident ordinary (NRO) accounts are similar to CGAS accounts, but there are some key differences between the two. NRO accounts are designed for non-resident Indians who earn income in India. In contrast, CGAS accounts are designed for individuals who earn long-term capital gains from the sale of assets such as property, stocks, or mutual funds.
Additionally, the tax implications and benefits of the two accounts are different. While gains deposited into a CGAS account are not subject to tax, gains earned in an NRO account are subject to tax.
Time Limit for Deposit in Capital Gain Account Scheme
Overview of the Timelines for Depositing Capital Gains into CGAS Accounts
Under the Capital Gain Account Scheme, there are specific timelines for depositing capital gains into the account. Individuals must deposit the capital gains into the account within a specified period, failing which they may lose the tax benefits offered by the scheme. The timelines for depositing the capital gains vary depending on the purpose for which the funds are to be used.
For instance, if an individual intends to use the funds to purchase a new property, the capital gains must be deposited into the account before filing the income tax return for that financial year. Similarly, if an individual intends to use the funds to construct a new property, the capital gains must be deposited into the account before the deadline for filing the income tax return for the financial year in which the property is constructed.
Consequences of Missing the Deposit Deadlines
If an individual fails to deposit the capital gains into the account within the specified timelines, they may lose the tax benefits offered by the scheme. The gains will then be subject to tax as per the regular income tax rates. Additionally, the individual may also have to pay a penalty for not depositing the gains within the stipulated period.
How to Extend the Deposit Time Limit Under Certain Circumstances
In some cases, individuals may be unable to deposit the capital gains within the specified period due to unforeseen circumstances such as illness or natural calamities. In such cases, they can apply for an extension of the deposit time limit by applying to the designated bank. The bank may grant an extension of up to one year from the end of the financial year in which the capital gains were earned.
Types of Deposits Available Under the Capital Gains Account Scheme
The Capital Gains Account Scheme (CGAS) offers varying features such as interest rates and withdrawal options, catering to the diverse needs and preferences of investors. Let’s explore the two main types of deposits available under the CGAS, namely Type A and Type B deposits.
| Account Type | Description | Capital Gain Account Interest Rate | Withdrawal |
| Type A | Savings deposit account | Similar to a regular savings bank account | Similar to savings bank account interest rate |
| Type B | Term deposit account | Similar to a fixed deposit account | Higher than savings bank account interest rate |
Capital Gains Account Scheme Interest Rate
Understanding the Interest Rate Structure for CGAS Accounts
The interest rate on the capital gain account scheme offered on the deposited capital gains is determined by the government and is subject to change from time to time. The current CGAS scheme interest rate is 7.15% per annum.
The interest rate is compounded quarterly and is credited to the account at the end of each quarter.
How Interest is Calculated and Credited to CGAS Account Holders
The interest on the deposited capital gains is calculated based on the balance in the account at the end of each quarter. The interest is calculated quarterly and is compounded quarterly. The interest earned on the deposited capital gains is tax-free and is credited to the account at the end of each quarter.
Comparison of CGAS Interest Rates with Other Investment Options
The interest rate offered on CGAS accounts is relatively higher than other investment options available to taxpayers, such as savings accounts or fixed deposits. However, the interest rate offered on CGAS accounts is lower than some other investment options such as equity mutual funds. Therefore, individuals should carefully consider their investment objectives and risk tolerance before investing in CGAS accounts.
Benefits of Using Capital Gain Deposit Scheme for Real Estate Investors
How CGAS Can Help Reduce Tax Liability for Real Estate Investors
Real estate investors can use the Capital Gain Account Scheme to reduce their tax liability on the gains earned from the sale of property. By depositing the capital gains into a CGAS account, they can claim a tax exemption for the amount deposited, thus reducing their taxable income. Additionally, they can use the funds deposited in the account to purchase or construct a new property, which can also provide tax benefits.
How to Use CGAS Funds to Purchase or Construct a New Property
Real estate investors can use the funds deposited in a CGAS account to purchase or construct a new property. To use the funds for this purpose, the capital gains must be deposited into the account before the deadline for filing the income tax return for the financial year in which the property is purchased or constructed. Additionally, the funds must be used within two years of depositing the capital gains into the account.
Advantages of CGAS Over Reinvestment in Bonds or Stocks
- Lower risk: CGAS offers a relatively safe and secure option for investing capital gains. Bonds and stocks carry a higher degree of risk due to market fluctuations and economic conditions.
- Tax benefits: The scheme allows investors to defer capital gains tax by depositing the gains in a CGAS account instead of reinvesting in bonds or stocks immediately. This deferral can help investors minimise their tax liability and potentially optimise their overall tax planning strategy.
- Flexibility: CGAS offers flexibility in managing capital gains. Investors have the freedom to choose when and how much to withdraw from the CGAS account, allowing them to align their cash flow needs with their investment objectives.
- Security: CGAS accounts are operated by authorised banks, ensuring a high level of security for the deposited funds.
- Preservation of gains: By depositing capital gains in a CGAS account, investors can preserve their gains without exposing them to market volatility. Bonds and stocks can be subject to fluctuations in value, which may affect the overall return on investment.
How can NoBroker help?
The Capital Gain Account Scheme is a useful tool for individuals looking to minimise their tax liability on capital gains earned from the sale of property.
By depositing the gains into a CGAS account, individuals can claim a tax exemption for the amount deposited and use the funds to purchase or construct a new property. Additionally, the interest earned on the deposited capital gains is tax-free, making it a more attractive option for investors looking to earn a steady income on their investments.
NoBroker can assist individuals with opening, managing and investing in CGAS accounts, providing them with the necessary guidance and support to make informed investment decisions. With its user-friendly platform and knowledgeable team of experts, NoBroker is the ideal partner for individuals looking to invest their capital gains safely and securely.
Frequently Asked Questions
A1. The unutilised amount in the Capital Gain Account Scheme continues to earn interest until it's withdrawn for eligible purposes like property purchase or construction.
A2. The interest rate on Capital Gain Account Scheme (CGAS) is determined by the government and is currently set at 7.15% per annum.
A3. The PNB Capital Gain Account interest rate is determined by the bank's Card Rate, as per circulars issued by the Bank. There are no additional rates for senior citizens or staff members under this scheme.
A4. The current interest on capital gain account fixed deposits varies depending on the bank and the duration of the deposit. It's advisable to check with your bank for the most accurate information.
A5. The SBI Capital Gain Account offers an interest rate of 6.50% for personal banking.
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