Is amount withdrawn by legal heir from the Capital Gain Deposit Accounts Scheme of the deceased taxable?
Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price.
It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.
The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc.
As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.
What is the Capital Gains Account Scheme?
Capital Gains Account Scheme was introduced in 1988 by the Central Government. The time limit available to the depositor for re-investment and availing exemption of capitals gains, in many cases is longer than the due date to file the return of income.
In such cases, the taxpayer is given an option of depositing such underutilised capital gains in ‘Capital Gains Account’ introduced under Capital Gains Account Scheme. Any capital gain invested in Capital Gains Account Scheme will be eligible for capital gain exemption as it would in case of re-investment.
Who can deposit in Capital Gains Account Scheme?
Category of taxpayer with capital gains who are eligible to invest in CGAS from Section 54 to 54F of the Income-tax Act, 1961 is provided below:
- 54 – Sale of residential house
- 54B – Sale of land used for agricultural purpose
- 54D – Compulsory acquisition of land and building
- 54E – Sale of any long term capital asset
- 54F – Sale of any long term capital asset not being residential property
- 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
- 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
- 54GB – Transfer of residential property
What are the types of Capital Gains Account that can be opened?
There are 2 categories of Capital Gains Account which are as follows:-
Capital Gains Account – Type A – Savings Account:
- This is like a normal savings account and the interest payable on this account is the same as the interest paid on normal savings account by that bank.
- In case of Type A Account, the deposit office shall issue a pass book to the depositor wherein all amounts of deposits, withdrawals, together with the interest due, shall be entered over the signature of the authorised officer of the Bank.
- Capital Gains Account Type A is advised when the amount of capital gains is to be used for construction of a house as the amount would be required to be withdrawn in various stages
Capital Gains Account -Type B – Term Deposit Account:
- This is like a fixed deposit wherein the amount is deposited for a fixed period of time. The interest rate on this account is equivalent to the interest paid on fixed deposits by the bank.
- As Type B accounts are same as Fixed Deposits Account, any withdrawal from this type of account attracts a penalty for pre-maturity withdrawal.
- Type B Term Deposit Account is advised when the amount of capital gains is to be utilised for purchase of a house.
- Capital Gains Account Type B is also of 2 types – Cumulative and Non-Cumulative.
- Under the cumulative option – the interest is re-invested and the total amount is paid at the time of the completion of the term period or at the time of withdrawl (whichever is earlier).
- Under the non-cumulative option, the interest is paid at regular intervals and is not reinvested.
What If the amount is withdrawn by the legal heirs? Will such withdrawn amount will be taxable?
By depositing an amount in the Capital Gains Account the taxpayer can claim an exemption from LTCG Tax at the time of filing income tax return.Amount from Capital Gains Account could be utilized subsequently for purchase or construction.
But what if the person who have earned the LTCG and who has deposited it in Capital Gains Account dies subsequently. Whether the legal heir is also duty bound to use the amount for purchase/construction as the case may be?
A normal assumption is that the legal heir enters the shoes of the deceased and such amount is required to be used for the intended purpose by the legal heir. However, this is not the case here. According to Circular No. 743 issued by CBDT on 06/05/1993, the legal heir can withdraw the amount without any tax implications.
What is mentioned in Circular No. 743 issued by CBDT on 06/05/1993?
Circular No. 743 issued by CBDT on 06/05/1993 states that a question was raised regarding the taxability of the unutilised deposit amount in the Capital Gains Account, in the case of an individual who dies before the expiry of the stipulated period.
It has been clarified that in such cases the said amount cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.
Hence, amount withdrawn by legal heir from the Capital Gain Deposit Accounts Scheme-1988 (CGDAS) of the deceased is Tax Free.