This article explains how capital gains tax can be saved by depositing the amount in specified bank accounts
Capital gains tax is levied on sale or transfer of a house. The capital gains tax is computed on the indexed cost of the house purchased, which is deducted from the consideration received. The indexed cost is computed according to the indexation rates notified by the Income Tax Department for each year.
You can reduce the capital gains tax payable by complying with the provisions specified under the Act. The benefit is available only to individuals and a Hindu Undivided Family (HUF). No other category of assessees are eligible for this concession.
The house may be self-occupied or rented out. It must be held for a period of more than 36 months before the date of sale or transfer. The asset transferred should include a building, or land appurtenant to it and a house. The income of the house should be chargeable to tax under the head 'Income from House Property'. Other immovable properties, although owned by an individual, are not eligible for this exemption.
In order to avoid being liable to pay capital gains tax, an assessee can either purchase a house within a period of one year before or two years after the date on which the transfer took place, or construct a house within a period of three years after the date of transfer.
The amount of capital gains not appropriated by an assessee towards the purchase of a new house within one year before the date of transfer of the original house, or which is not used by him for purchase or construction of a new house before the date of furnishing the returns of income, should be deposited by him in a specified bank. The amount should be deposited in the 'Capital Gains Account Scheme'. This account can be opened with any nationalised bank.
The scheme is called 'Capital Gains Account Scheme, 1988' and is applicable to all assessees having capital gains .The deposits may be made in one lump sum or in instalments at any time. The amount should be deposited before filing the income tax returns.
Under the scheme, there are two types of accounts. You can go in for 'Deposit Account A. This account is like a savings deposit account. Withdrawals may be made from the account from time to time subject to some conditions of the scheme. This account is suitable for assessees who are planning to construct a house over a period of time.
Alternatively, you can open Deposit Account B. This account is like a term deposit, which is payable after a fixed period of time. The interest earned on the deposit may either be withdrawn periodically or reinvested.
In order to open the account, an assessee must fill up the prescribed application form in duplicate and specify the type of account - A or B. The withdrawals from Deposit Account A can be made through a prescribed form. In case of Deposit account B, the depositor should first transfer the amount to Deposit Account A, and then make the withdrawals. The deposit can be transferred from one branch of a bank to another branch of the same bank. A depositor may close the account with the approval of the assessing officer.
In case of a Deposit Account B, it has to be specified whether the account should be cumulative or noncumulative. The proof of such deposit should be attached with the income tax returns. Both the accounts are eligible for interest as per the guidelines of the Reserve Bank of India.
A depositor can have nominees to the account by filling the relevant forms. The amount can be used in accordance with schemes the Central Government frames. The amount withdrawn can be used for the purchase or construction of a house. The amount withdrawn should be used for this purpose within 60 days of such withdrawal. Any unused amount should be redeposited in the Deposit Account A.
The amount already used by an assessee for the purpose of purchase or construction of a new house together with the amount deposited is deemed to be the cost of the new house. In case the amount deposited is not used wholly or partly for the purchase or construction of a new house within the period specified, the unused amount will be charged as income of the previous year in which the period of three years from the date of the transfer of the original house expires. The assessee is entitled to withdraw such amount in accordance with the provisions of the scheme.
