If you wish to save income tax on long term capital gains from sale of any specified asset like equities, land, real estate then one of the best ways is to utilise Section 54 or Section 54F or even 54EC if it’s applicable for your specific case. To give a brief overview of Section 54 and 54F, it allows individual and HUF taxpayers to save tax on capital gains arising from the sale of a long-term capital asset, other than a residential property, by investing the gains in a new residential property.
Section 54 says that an individual taxpayer may claim tax exemption on long term capital gains (LTCG) arising from a sale of residential house property/ land by way of investing the capital gains in a residential property in India. The exemption for 2 properties for capital gains up to Rs 2 crore is only once in a lifetime benefit under Section 54. 54EC says that when a taxpayer sells long-term immovable property (land or building or both), they have the option to avail capital gain exemption under Section 54EC by investing in certain bonds.
But if you see the conditions of these income tax savings sections (54F/54/54EC), then all of them mandate you to invest the long term capital gains from such a sale, in some kind of assets, be it house properties (Section 54 and 54F) or specified bonds (Section 54EC).
All of these investment-based tax savings options under Section 54/54F/54EC are fine but these sections also mandate you do it before a certain period of time. This is where it can get tricky and to save yourself from this situation you may use Capital Gains Account Scheme (CGAS). NRIs can use Non-Resident Capital Gains Account Scheme (NRCGAS) to save capital gains tax.
When Capital Gain Account Scheme helps
The tricky part is the question of what if you can’t find any suitable house to buy within the Section 54 or 54F mandated timeline. Under Section 54 you should purchase a residential house either 1 year before the date of sale/transfer or 2 years after the date of sale/transfer. Under Section 54F you should purchase the new house either 1 year before or 2 years after the sale of asset or construct a house within 3 years of sale.
Because if you don’t invest the gains in the specified assets within given timeline then the tax department will impose income tax on the gains, and you will lose the opportunity to save tax. The solution to this problem is the Capital Gain Account (CGAS) Scheme. CGAS is the gateway through which you can park this long-term capital gains from sale of specified assets for up to 3 years without the worry of it being taxed by the government.”The Capital Gains Account Scheme (CGAS) is a scheme introduced by the government to facilitate taxpayers who intend to claim an exemption from capital gains tax under Section 54 or 54F but are unable to invest the capital gains in the specified assets (such as a new residential property) before the due date for filing their Income Tax Return (ITR),” says Chartered Accountant (Dr.) Suresh Surana.
Read below to know more about the Capital Gain Account Scheme (CGAS) and how it can help you save tax.
What is a Capital Gain Account (CGAS) and how does it help to save income tax?
The Capital Gains Account Scheme (CGAS) is a scheme introduced by the Government of India under the Income Tax Act, 1961. Under this scheme if you deposit the long-term capital gains from the specified assets then you can still save capital gains tax. However, this deposit needs to be made before the due date of filling an income tax return (ITR).
“Under Section 54 (Exemption from Capital gain on sale of a residential property) and Section 54F (Exemption from Capital gain on sale of Long term capital asset other than a residential property), taxpayers can claim an exemption from capital gains tax if they reinvest the proceeds in a new residential property within a specified time frame. However, if the taxpayer is unable to complete the reinvestment before the ITR filing deadline, CGAS allows them to deposit the unutilized gains into a designated account, preserving their eligibility for the exemption,” says Surana.
According to Surana, “The deposited amount must be used to purchase or construct the new property within the prescribed time limits. If not utilised, it will be taxed as capital gains in the year in which the time limit for utilization for such amount expires.
Time Limit for choosing between section 54/54F and CGAS
- Investment Deadline for Section 54 & 54F
In order to claim an exemption under Section 54 or 54F, the taxpayer must:
- Purchase a new residential property within one year before or two years after the date of sale, or
- Construct a new house within three years from the date of sale.
Deadline for Depositing in CGAS
If the taxpayer does not utilise the capital gains for the purchase/construction before the due date for filing the ITR (generally, in case of salaried taxpayer the deadline is July 31 after completion of the financial year), they must deposit the unutilised amount into a Capital Gains Account (CGAS) before the due date of filing the return.
Table showing who can deposit in the Capital Gains Account Scheme (CGAS):
| Section | Taxpayer Category | Types of Capital Gains |
| 54 | Individual, HUF | Long term capital gains from the sale of a residential house property |
| 54B | Individual, HUF | Capital gains from the sale of agricultural land used for agricultural purposes |
| 54D | Any Person (Individual, HUF, Firm, Company, etc.) | Capital gains from the compulsory acquisition of land/building used for industrial purposes |
| 54F | Individual, HUF | The amount of the net consideration from the sale of any asset other than a residential house |
| 54G | Any Person (Individual, HUF, Firm, Company, etc.) | Capital gains from shifting an industrial undertaking from an urban to a rural area |
| 54GA | Any Person (Individual, HUF, Firm, Company, etc.) | Capital gains from shifting an industrial undertaking from an urban area to a Special Economic Zone (SEZ) |
Source: Tax2Win
Brief overview of Section 54 and how it can help save capital gains tax
According to Surana, Section 54 of the Income Tax Act, 1961 provides tax exemption on long-term capital gains (LTCG) arising from the sale of a property. “The exemption can be claimed if the taxpayer invests the LTCG amount in one residential house in India. However, as per the amendments introduced vide Finance Act 2021, the exemption can also be claimed if the taxpayer invests the LTCG in two residential houses, but subject to the following conditions:
- The capital gain must not exceed Rs 2 crore.
- The investment must be made in two residential houses, but the taxpayer can only exercise this option once in a lifetime.
“Further, the threshold limit of considering the quantum of re-investment in new house property (i.e. cost of new asset) would be restricted to Rs. 10 crores for the purpose of claiming deduction under section 54. So, while Section 54 traditionally was allowed only one house, now the option for two houses is available subject to the above mentioned conditions,” says Surana.
Chartered Accountant Mohit Gupta highlights that the Capital Gains Account Scheme (CGAS) is available under both the old and new tax regimes. “While the new tax regime simplifies the taxation process by eliminating most exemptions and deductions, it does not remove all opportunities for tax-saving, such as the CGAS.”
What is a non-resident CGAS account (NRCGAS)?
According to Abhishek Soni, co-founder, Tax2Win, since the CGAS scheme is applicable only to Indian residents. Non-residents have to open a non-resident CGAS account (NRCGAS).
Soni explains: “A Non-Resident Capital Gains Account Scheme (NRCGAS) account is a specialised account designed for Non-Resident Indians (NRIs) to defer capital gains tax liabilities arising from the sale of assets in India, such as property. By depositing the capital gains into this account, NRIs can avail tax exemptions under specific sections of the Income Tax Act, 1961, provided they reinvest the funds in specified assets within stipulated timeframes. NRIs who have accrued capital gains from the sale or transfer of assets specified under Sections 54 to 54GB of the Income Tax Act, 1961 are eligible to open an NRCGAS account. NRIs must open the account with an authorized bank branch in India by submitting Form A, along with necessary documents such as PAN card, proof of address, and details of the asset sold.”
“You must open the account before the deadline for filing your ITR, and the funds must only be used to purchase/construct a residential property. If the money is not used to buy/build a residential property within the stipulated time, the capital gains exempted earlier will be taxed in the future year,” says Soni.
Deadline for Depositing in CGAS for Indians
“If the taxpayer does not utilise the capital gains for the purchase/construction before the due date for filing the ITR, they must deposit the unutilised amount into a Capital Gains Account (CGAS) before the due date of filing the return,” says Surana.
Surana says it is pertinent to note the facility of CGAS is only available under Section 54, 54D, 54B, 54F etc. “As such, the said Scheme is not applicable in case of Section 54EC (which provides tax exemption upto Rs. 50 lakhs on capital gains derived from immovable property provided such gains are invested in specified bonds within 6 months from date of sale/ transfer of land).”
There are 2 types of deposits that individuals can avail of under the Capital Gain Account Scheme-
- Type A – It is a savings account that pays you interest similar to that of a savings account. You can withdraw the money deposited in this account at any time.
- Type B – The type B accounts are very similar to a fixed deposit. This type of account can be held for a maximum of 3 years. The interest rates for these accounts are similar to that of an FD.
While the capital gains held in such an account is tax free, but the interest earned on such amounts is not. Moreover, TDS will be deducted if the interest crosses a specified limit as per normal FD accounts.
“Any interest earned on Type A as well as Type B accounts is chargeable to tax. TDS is deducted, and a certificate is issued to the depositor,” says Soni.
“Taxpayers have the option to deposit the capital gains in a designated Capital Gains Account Scheme (CGAS) before the due date for filing their income tax return (ITR). The deposited funds must be used for purchasing a property within 2 years or for construction within 3 years; otherwise, they will become taxable as LTCG,” says Gupta.
Withdrawal rules for Type A and Type B Capital Gain Account Scheme (CGAS) for Indians
Here are the details:
Type A
No Restrictions on Withdrawal: You can withdraw any amount from Type A without any restrictions.
Utilisation: Any amount withdrawn must be utilized for specified investments within 60 days of withdrawal.
Forms for Withdrawal: Form C is submitted for the first withdrawal, and Form D is submitted for any subsequent withdrawals. These forms require details of the manner of utilisation of the previously withdrawn amounts.
Type B
Premature Withdrawal: While premature withdrawal is allowed, it must first be transferred to a Type A account.
Utilisation Requirement: Like Type A, any withdrawn amount must be utilized for specified investments within 60 days of withdrawal.
Key Restrictions: No Chequebook or Debit Card is issued for either account type. Withdrawals and re-deposits are strictly managed through Form submissions (Form C and Form D).
Gupta says: CGAS offers two types of accounts: “Interest earned on both accounts is taxable, and any unused funds after 3 years are treated as taxable LTCG. Withdrawals must comply with CGAS rules, and funds can only be used for property investment. By effectively utilizing CGAS, taxpayers can preserve tax benefits and avoid rushed property investment decisions.”
Surana says: “If the amount in CGAS is not utilised for the purpose of reinvestment within 60 days from the date of its withdrawal, such unutilized amount will be taxable as capital gains.”
So if you find a suitable residential property to reinvest your long term capital gain then you can take out money from the CGAS account and utilise it within 60 days. In case you could not find a suitable property but want to save income tax then you can go for buying a bond under section 54EC if eligible. If these options don’t work then you will have to take out your money and report it in your ITR and pay the applicable income tax on such capital gains.
