Capital gains means any profits or gains from the transfer of a capital asset (fixed asset, jewelry, shares and mutual fund units).

There are three instruments available for an investor to save capital gains tax u/s 54EC – bonds issued by REC (Rural Electrification Corporation), NHAI (National Highways Authority of India) and NABARD (National Bank of Agricultural and Rural Development). However, what if an investor does not want to invest in these bonds, but intends to purchase a property from it and at the same time wants to get a deduction from his capital gains tax? In this case, the investor has an option to open a Capital Gains Scheme of Deposit Account (CGSDA) in any branch of a public sector bank in accordance with the Capital Gains Account 1988.

Lets take a case into consideration where capital gains are arising out of the transfer of a residential house property. The investor has made a capital gain and is planning to purchase another house. However, he is not in a position to purchase the house before the due date of filing his returns and also wants to save capital gains tax. In this case, the investor can open a scheme of deposit in any branch of a public sector bank in accordance with the Capital Gains Account 1988.

The amount deposited in the CGSDA shall be deemed to be utilized for the purchase/construction of the new house. However, if the amount so deposited is not utilized within the stipulated time period, then that amount shall be treated as long-term capital gain of the previous year. The stipulated time period varies depending under which section the investor is opening the scheme of deposit. Below are given the various cases under which the investor can open a scheme of deposit account.

CASE I
Capital gain arising out of transfer of residential house property – deduction from tax is available u/s 54, if the amount so deposited in the CGSDA is utilized for purchase of a new house within the stipulated time period of 3 years.

CASE II
Capital gain arising out of transfer of the land used for agricultural purpose – deduction from tax is available u/s 54B, if the amount so deposited in the CGSDA is utilized for purchase of another land for the use agricultural purpose within the stipulated time period of 2 years.

CASE III
Capital gain arising out of compulsory acquisition of land and building, forming part of industrial undertaking- deduction from tax is available u/s 54D, if the amount so deposited in the CGSDA is utilized within the stipulated time period of 3 years.

CASE IV
If the capital gain arises on transfer of a long-term capital asset other than a house property is exempt from tax u/s 54F, if the amount so deposited in the CGSDA is utilized for purchase of another house property within the stipulated time period of 3 years.

CASE V
If the capital gain arises on transfer of assets in cases of shifting of industrial undertaking from urban area is exempt from tax u/s 54G, if the amount so deposited in the CGSDA is utilized within the stipulated time period of 3 years.

E.g. X sells a residential house property on 5th January 2002 and makes a capital gain of Rs 500,000. He wants to purchase another house property from the gains arising out of the sale of the property. He is not in a position to purchase the new house before 31st July, 2002 by when he has to file his tax returns for the year ended March 31, 2002. In this case, he invests the gains in the scheme of deposit account and still gets exemption u/s 54. However X utilizes only Rs 400,000 within this stipulated period i.e. 3 years from the date of sale of the old house. The remaining Rs 100,000 is treated as long-term capital gain and will be taxed accordingly on expiry of 3 years from date of sale i.e 5th January, 2002.

If you are in Mumbai and are interested in investing in bonds, fixed deposits or other investment products, please register here

Add Comments