A Brief Outlook on Capital Gains Accounts Scheme

To provide the benefit of exemption to taxpayers from Capital Gains, the government introduced the Capital Gains Accounts Scheme in 1998. It provides tax benefits when an assessee sells an asset and reinvests the money. Capital Gain Tax is the tax you pay for the profit by selling assets. All the assessee eligible for an exemption under Sections 54, 54B, 54D, 54F, 54G, and 54GB can apply to the Scheme.

These sections deal with different types of capital gains and the conditions under which you can get a tax break if you reinvest the gains in specific ways. Section 54EC and Section 54EE do not apply to the Capital Gains Accounts Scheme.

The Union Budget has announced several changes to the tax regime for long-term capital gains. These changes impact all types of assets, especially drawing attention to removing indexation benefits. Understanding how capital gains are classified, taxed, and exempted can help in effective tax planning.

Key Changes in Budget 2024

Some of the key changes that took place in Indian budget 2024 are as follows:

1. Holding Period:
2. Short-term assets: 12 months
3. Long-term assets: 24 months
4. The 36-month holding period for some assets has been removed.
5. Listed securities are considered long-term if held for more than 12 months, while other assets are long-term if held for more than 24 months.
6. Tax Rates:

Short-Term Capital Gains:

• The tax on short-term capital gains has increased to 20% from 15%
•  for listed equity shares, equity-oriented funds, and business trust units.
• Short-Term Capital Gains will continue to be taxed for other assets based on your income tax slab rates.

Long-Term Capital Gains:

• The tax rate on Long-Term Capital Gains from other assets has been reduced from 20% to 12.5%.
• Indexation benefit (adjusting for inflation) has been removed for these assets.

Long-Term Capital Gains (LTCG) Exemption Limit:

• The annual exemption limit for gains from the sale of equity shares, equity-oriented funds, or business trust units has increased from ₹1 lakh to ₹1.25 lakh.
• Gains above this limit will be taxed at 12.5% (up from 10%).

Options for Real Estate Transactions:

• If you sell real estate bought before 23rd July 2024, you can choose between:
• 12.5% tax without indexation.
• 20% tax with indexation.

Why Deposits Won’t Reduce Taxes from 20% to 12.5%?

Deposits in the Capital Gains Accounts Scheme (CGAS) won’t reduce taxes from 20% to 12.5% because the tax rate depends on the timing and nature of the account. Knowledge of tax law changes is necessary to understand this.

Pre-July 23^rd, 2024 – If you sell a property before July 23^rd, 2024, you can benefit from the indexation that will adjust the inflation. It reduces the amount of profit you are taxed on. After inflation, a 20% tax is needed to pay on the profit.

Post July 23^rd, 2024—If you sell a property after July 23^rd, 2024, no indexation is allowed. You have to pay the tax at the lower rate of 12.5%.

Tax Rate and Sale Date: The tax rate is based on when you sell the property, not when you receive the money.

 Law Changes: The new tax rules apply only to sales after July 23, 2024; sales before that date follow the old rules.

Fixed Tax Rate: For properties sold before July 23, 2024, you pay the old tax rate of 20%, regardless of when you get the money.

Timing of Tax Changes: New tax rates affect only sales made after the rule change; earlier sales stick with the old rates.

By depositing the gains into CGAS (Capital Gains Accounts Scheme), you can postpone the payment of taxes until you use the money for a new property or the specified time limit of the account. It would otherwise be treated as a capital gain and taxed. 

For example, Mr John sold his property on September 20^th, 2022, and deposited the capital gain in his CGAS account. The deadline to invest in another property was August 31^st, 2025. Since this is after July 23^rd, 2024, Mr John did not use the money to invest by the deadline. Then, that gain will be taxed at 20% (not 12.5%).

Note: It is recommended to take the help of experts in tax planning for better understanding and tax reductions for your annual tax payment.

Eligibility to Deposit in Capital Gains Accounts Scheme

Categories of taxpayers eligible to deposit in the Capital Gains Accounts Scheme are given in the table below;

Section	Capital Gain Made On	Category of Person
54	Sale of residential house	Individual or HUF
54B	Sale of Land Use for Agricultural Purposes	Individual or HUF
54D	Compulsory Acquisition of Land and Building	Any Taxpayer
54E	Sale of any long-term capital asset	Any Taxpayer
54EC	Sale of any long-term capital assets being land building or both	Any Taxpayer
54F	Sale of any long-term capital assets not being residential property	Individual or HUF
54G	Transfer of asset (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area	Any Taxpayer
54GA	Transfer of asset/s (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area to Special Economic Zone	Any Taxpayer
54GB	Transfer of residential property	Any Taxpayer

When and How to Make Deposits in CGAS?

Taxpayers can avail of the benefit of exemption by depositing to the special account under the provision of the Capital Gains Accounts Scheme. The unspent capital gains must be deposited into the Capital Gains Account before submitting a tax return.

Types of Deposit in Capital Gains Accounts Scheme

Here is the list of types of deposits in the Capital Gains Accounts Scheme:

Deposit Account A– The deposit made under account A shall be a ‘savings deposit’ similar to the regular savings bank accounts. The depositor can withdraw from the account from time to time. This account is comparatively easier to access.  

Deposit Account B—The deposit made under this account is a fixed-term deposit. The depositor has the option to keep the deposit as a cumulative or non-cumulative deposit. Unlike Deposit Account A, the withdrawal can only be made after the expiry of the period.

Conclusion

The Capital Gains Accounts Scheme (CGAS) allows you to defer taxes and reinvest your capital gains, but it doesn’t change the tax rate applied to the gains based on the sale date. A common misconception is that CGAS can reduce the tax rate from 20% to 12.5%. The impact of indexation (which adjusts the purchase price for inflation) varies depending on individual circumstances.

To learn more about tax-related services & guidance, you may visit our official website taxeye.

Frequently Asked Question