LTCG tax: Paying only 12.5% tax on Capital Gains Accounts Scheme withdrawals while filing ITR FY2024-25? Tax dept could soon raise tax demand

Time of India

25-07-2025

What is the Capital Gains Account Scheme?
Taxation of the unutilized funds or premature withdrawal
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The Tax Rate Dilemma: 12.5% or 20%?
Tax department's view
Word of caution
When one earns capital gains on selling a long-term capital asset (like a house, land or other capital asset) tax exemption on such gains can be claimed by investing the sale proceeds or capital gains in another specified asset (e.g., another house, land for agricultural purposes, etc.) within a specified time frame (usually within two or three years from the date of transfer). However, if the reinvestment is not made by the date the Income Tax Return (ITR) is due for the relevant financial year, one can still claim capital gains tax exemption by depositing the proceeds/gain amount in a Capital Gains Account with an authorised bank before the ITR filing deadline.The Capital Gains Account Scheme (CGAS) is a special facility offered to taxpayers under the current income tax laws, allowing taxpayers to claim long-term capital gains (LTCG) tax exemption and defer reinvesting the gains in eligible assets. In order to claim the LTCG tax exemption, the amount deposited in CGAS has to be invested in eligible assets within a prescribed time period as outlined in sections such as 54, 54B, 54D, 54F, and 54G of the Income Tax Act (ITA). Under this scheme, taxpayers can deposit uninvested capital gains in a designated bank account and later use the funds for the eligible investment within the prescribed period, thereby availing tax exemption.Indian residents can open CGAS accounts, while non-residents are required to open Non-Resident Capital Gains Account Scheme (NRCGAS) accounts to avail of the facility. Deposits can be made through cheque, demand draft, or net banking, either in a single payment or in instalments. The deposited amount must be utilized within a stipulated time to invest in the specified assets to retain the tax benefit.If the deposited funds are not utilised within the prescribed period for the specified purposes, the unutilized amount is deemed as long-term capital gains in the financial year when the deadline expires. Consequently, the taxpayer becomes liable to pay tax on this deemed income.In some cases, taxpayers may choose to prematurely close the CGAS account or transfer the unused funds. This requires prior approval from the relevant income tax authority, which grants permission only after ensuring that all applicable taxes have been duly paid.It is important to understand that the tax liability arises not due to transfer of a new asset, but because the exemption previously claimed stands withdrawn.The ITA was amended through the Finance (No. 2) Act, 2024, introducing a reduced tax rate of 12.5% on long-term capital gains on transfer of capital assets made on or after July 23, 2024. This change led to uncertainty: If someone had deposited sale proceeds/capital gains from a sale that took place before this date in CGAS, but failed to utilize the funds within the allowed timeframe, would the applicable tax rate be the older tax rate of 20% or the new tax rate of 12.5%?To clarify, consider an example: Mr. A sold a property on August 1, 2021 (in FY 2021-22) and deposited the capital gains in the CGAS. However, he did not utilize the funds to purchase the specified asset before the CGAS deadline, which expired in August 2024, i.e. after the 12.5% rate came into effect. In this case, should the tax be levied at 20% (the rate applicable at the time of the original sale) or at 12.5% (since the gain is deemed to arise in a later financial year)?This scenario raises a key question: Will the applicable tax rate correspond to the year of the original transfer or to the year in which the exemption is withdrawn due to non-utilization.Though the income tax department has not released any circular or press release addressing the above question, however, the ITR utilities released for the financial year 2024-25 (assessment year 2025-26) are applying the tax rate of 12.5% on such deemed capital gains. This suggests that the department considers the gain to have arisen after July 23, 2024, which is subject to the new lower rate, i.e. as per the department, the applicable tax rate on deemed gains is 12.5%, not the earlier 20%.The department may have made this change intentionally. However, it's also important to keep in mind that if this change is made unintentionally, then the possibility of them updating the ITR utilities at a later date and raising a demand cannot be ruled out.The author is of the view that the deeming provision means the tax event (expiry of CGAS period) is a statutory fiction to reverse a previously claimed deduction; it is not an actual new sale or transfer that would be eligible for the new lower rate.The tax rate has to be seen as related to the date of sale of the asset. Meaning thereby, the lower tax rate of 12.5% applies only to transfers of long-term capital assets made on or after 23rd July 2024. Where the asset was sold prior to 23rd July 2024 and the funds were not invested within the stipulated time, the gain is still taxed at 20%, since the taxable event is linked to the transfer date, not the deemed income date.It is also important to remember that the 20% tax rate applies to long-term capital gains calculated with indexation, while the reduced 12.5% rate applies to gains without indexation. Therefore, applying the lower 12.5% rate to gains that have been computed using indexation would not even be logical, as the two are based on different methods of calculation.Last year, regarding section 87A rebate claimed by taxpayers, initially the ITR utility allowed the rebate, but was amended later to disallow it, and taxpayers were asked to pay the differential tax. Given this recent experience, it would be prudent for taxpayers to ensure that the correct compliance is done, thereby avoiding future tax complications.(The article is authored by Ashish Karundia, founder, Ashish Karundia & Co, a chartered accountancy firm.)