The booming real estate market had meant that Kapil Kumar could manage to sell his house in Pune for a neat profit. He had bought the place ten years ago with the idea that one-day he would like to retire from his job and also from Mumbai.
However, ten years on, the price that he was getting for his house was something that he hadn't even dreamt of. Wanting to make hay while the sun shines, the deal had been completed in record time. The only hitch that remained was the capital gains tax. Neat profit meant neater tax and he was thinking of ways of saving it.
He had heard that investing the profit back in real estate does save tax. However, he didn't want to buy in this market and in any case and March 31 was less than four months away. Too little time to decide, identify and purchase. A visit to his Chartered Accountant (CA) was warranted. May be he could find a way out.
He did. Kapil learnt from his CA that the Income Tax Act exempts the capital gains from the sale of a house if the taxpayer invests within two years from the date of sale or constructs within three years from the date of sale, another house property. If the entire capital gain is not used, proportionate deduction is available.
Now, though Kapil has two years to buy a new house; however, by July 31, which is the last date for filing the tax return, what if he hasn't found the right property?
How does he convey to the Income Tax office that he does indeed intend to buy a house within the time allotted to him and hence will not be paying tax on the capital gains earned during the year?
In such cases, said his CA, you have to keep the money in a special fixed deposit known as the Capital Gains Account Scheme (GGAS).
Say Kapil earned long-term capital gains of Rs 50 lakh. The tax @ 20% on this amount works out at Rs 10 lakh (the 3% education cess is ignored for ease of understanding). Sec 54 offers him exemption from this tax if he purchases within 2 years or constructs within 3 years a residential house costing Rs 50 lakh.
Prior to 1988, Kapil would have been required to pay the tax in the financial year during which the capital gains arose, even if he intended to buy or construct a house. After purchasing or constructing a house within the stipulated time frame, he could pray for the refund. When would he actually receive the refund depended upon the strength of his prayers. Moreover, it was inconvenient for the ITO to dig up the past records to check the veracity of the claim.
Fortunately, the Tax Department was seized of this impractical approach. CGAS - introduced in 1988, eliminated the need to reopen the assessments for rectifications.
Therefore, in effect, CGAS is a special account with banks or specified institutions to be used when the amount of capital gain is not utilised for the purchase or construction of the new asset before the due date of furnishing return of income. (Notification No. 724(E) dated June 22,1988)
If the amount deposited is not utilised fully for purchase or construction of new asset within the stipulated period, then the amount not so utilised will be treated as capital gain of the year in which the period of three years from the date of sale of the original house expires.
- There are two types of accounts; Type-A: savings deposit and Type-B : term deposit. Type-B can be either cumulative or non-cumulative. Interest rates will be the same as those applicable to the normal savings and term bank deposits.
- The effective date for claiming exemption will be the date on which the bank receives the application, subject to realisation of cheque or draft. However, the interest will be payable from the date on which cash is paid or the cheque or draft is realised.
- Amounts are freely transferable from Type-A to Type-B and vice versa. For premature transfers from Type-B to Type-A, the normal penalties will be applicable.
- Withdrawals can be made only from Type-A by submitting a declaration that the amount sought to be withdrawn is proposed to be utilised for the intended purpose. Where the amount sought to be withdrawn exceeds Rs. 25,000, the bank shall make payment by way of a crossed demand draft drawn in favour of the person to whom the depositor intends to make the payment. The amount withdrawn shall be utilised within 60 days. The unutilised portion, if any, shall be redeposited into CGAS.
That being said, there do exist some lacunae in this otherwise useful product. Let us see what these are:
1. CGAS does not allow any withdrawals, except for the specified purpose (of buying the house), even of interest! Moreover, the investor is required to pay tax on this interest (to which he has no access) on accrual basis out of his other income!!
2. Even if the sale is effected in say the first month of the fiscal (say April '09), the taxpayer may deposit the amount in CGAS on the last date for filing returns. In other words, he can freely utilise this money for 15 months (April 09 to July 10) as he likes.
Ergo, say in July '09 he buys a 2-year FD under CGAS and does not lift even a finger, either to purchase or to construct a house. In that case the amount not so utilised shall be charged as the income of the previous year in which the period of 3 years expires. That means he has to pay capital gains tax in FY 11-12. The first date for payment of advance tax is 15.9.12 by which time his FD conveniently matures to provide him the required funds.
3. We have already discussed the fact that if the amount is not utilised wholly or partly for the desired purpose, within the specified period, the unutilised amount shall be treated as capital gains of the year during which the specified period expires.
If this amount is to be treated as capital gain of that year, can the assessee purchase another house within 2 years or construct within 3 years? Can he use CGAS once again?
It is illogical to do so and also the fact remains that this capital gain has not arisen out of sale of house, shares, etc. Therefore the answers to these questions are in the negative.
However, experts believe that the taxpayer has got a right to setoff carried forward capital losses against these gains.
So, all in all, the facility of CGAS, while being extremely useful as a tax planning tool has left some questions unanswered. It is hoped that either in the Budget or by way of special notifications, the issues raised above would be addressed by the authorities.
The authors may be contacted at email@example.com