The Capital Gains Account Scheme (CGAS), introduced in 1988 under the Income Tax Act of 1961, is a provision designed by the government to help taxpayers manage their capital gains tax liability. It allows individuals to deposit the proceeds from the sale of capital assets into designated accounts at authorised public sector banks. This scheme is particularly useful for those unable to reinvest the capital gains into new assets immediately.

Also Read: Direct Tax Laws To Be Simplified: Here Are Key Things To Know

Eligibility Criteria for Depositing in CGAS

The following conditions must be met to deposit capital gains into a Capital Gains Account Scheme (CGAS) account:

1. Capital Gains Source: The taxpayer must have capital gains from the sale or transfer of assets specified under sections 54 to 54GB of the Income Tax Act, 1961. These sections include various types of assets and conditions under which capital gains exemptions can be claimed.

2. Residency Requirement: The CGAS scheme is available only to Indian residents. Non-residents are required to open a non-resident Capital Gains Account Scheme (NRCGAS) if they wish to utilise similar provisions.

3. Proof of Capital Gains: The depositor must provide proof of capital gains from the sale of the specified assets. This documentation is necessary to validate the source of the funds being deposited into the CGAS account.

Types of Deposits Available in CGAS

Type A – A savings deposit similar to a regular savings bank account. It earns interest at the same rate as standard savings accounts, and a passbook is provided to track transactions. This account offers high liquidity, meaning you can withdraw funds at any time.
Type B – A term deposit similar to a fixed deposit (FD) scheme offered by banks. It accrues interest at a rate comparable to standard FD schemes, and the terms regarding early withdrawal are also similar. If you withdraw funds before the tenure ends, you may incur a penalty for premature withdrawal, just as with a regular FD.

Steps to open a Capital Gains Account Scheme

1. Complete the Application: Submit an application using Form A.
2. Submit Documents: Provide the following documents: PAN card, proof of address and photograph.
3. Make Deposits: Deposits can be made using cash, cheque, demand draft, or other accepted methods. For cheques and demand drafts, the deposit date is recorded as the date the instrument is received at the deposit office, pending clearance.
4. Deposit Options: You can deposit funds in a lump sum or instalments.
5. Separate Applications: If you need exemptions under different sections, submit separate applications and open separate accounts for each section.

Withdrawals from the Capital Gains Account Scheme

There are no limits on withdrawals from Type A savings accounts. While early withdrawal from a Type B account is permitted, it must be done after moving the funds to a Type A account, and there may be a corresponding penalty.
To withdraw money from the Capital Gains Account Scheme, you must submit Form C. The funds must be utilised for specific investments within 60 days after withdrawal. The money cannot be redeposited immediately. Fill out Form D to apply for a second withdrawal.

Tax Implications: Interest Earned and Capital Gains Tax Rate

The interest earned on deposits in a CGAS account is taxable in the year it accrues, regardless of whether the funds are withdrawn. Recently, the tax rate for long-term capital gains on most assets has been rationalised to 12.5 per cent without indexation, down from the previous rate of 20 per cent with indexation (Section 112). This change aims to simplify the taxation process and facilitate easier computation of capital gains.