Capital Gains Account Scheme (CGAS)
The Capital Gains Account Scheme (CGAS), 1988 is a government-notified deposit scheme that allows taxpayers to park long-term capital gains from the sale of a property or specified asset in a designated bank account before the due date of filing income tax returns, preserving the exemption under Sections 54, 54B, 54F, or 54EC while the replacement asset is being acquired or constructed.
Capital gains exemption provisions under the Income Tax Act imposed strict deadlines for reinvestment. Section 54 required reinvestment in a new residential property within one year before or two years after the date of sale, or within three years for construction. Section 54B required reinvestment in agricultural land within two years. Section 54F required reinvestment in residential property within two years of sale or three years of construction. If a taxpayer sold a property and could not complete the reinvestment by the due date for filing returns — typically 31 July for non-audit cases — the capital gain would otherwise become taxable.
The CGAS, notified under the Capital Gains Accounts Scheme, 1988, solved this problem by designating specific public sector banks (including all nationalised banks and certain other scheduled commercial banks) to maintain two types of accounts: Type A (savings account) and Type B (term deposit account). A taxpayer who could not complete the qualifying reinvestment before the return filing date deposited the unutilised capital gains amount into a CGAS account. This deposit was treated as deemed reinvestment for the purpose of claiming the capital gains exemption in the return of income.
Type A was a regular savings account with no lock-in, allowing withdrawals for gradual deployment toward property purchase or construction. Type B was a fixed-term deposit earning interest but requiring the taxpayer to convert it to Type A before utilising funds. Transfers from Type B to Type A required the approval of the jurisdictional income tax officer, adding an administrative layer. Interest earned on CGAS deposits was taxable as income from other sources in the year of accrual or receipt, which reduced but did not eliminate the financial merit of parking funds there.
The critical condition was that funds deposited in CGAS must be utilised for the specified purpose — constructing or purchasing a residential property, or agricultural land, as applicable — within the original reinvestment window from the date of the original sale. If the funds were not utilised within the prescribed period, the unutilised amount was treated as long-term capital gains in the year the original reinvestment window expired and taxed accordingly at 20% with indexation (under the pre-Budget 2024 regime) or 12.5% without indexation (post-Budget 2024).
For real estate transactions involving sale of high-value properties in metros — where capital gains could run into several crore rupees — the CGAS was frequently used by sellers who were waiting for an appropriate reinvestment property, navigating registration and registration delays, or managing construction timelines. The account kept the gains ring-fenced and immune to inadvertent spending while the clock ran on the reinvestment deadline.
A withdrawal from CGAS for a purpose other than the specified reinvestment — such as personal consumption or unrelated investment — was treated as a capital gain in the year of such withdrawal. This anti-avoidance provision ensured the scheme was not misused as a tax-deferred savings vehicle. Taxpayers were also required to submit details of CGAS accounts in their income tax return Schedule CG, providing the tax department with visibility into whether unutilised balances were being tracked.