The Capital Gains Account Scheme (CGAS) is a facility provided by the Income Tax Department, through its circulars and guidelines, to enable taxpayers to park the net sale proceeds (or capital gains) from the sale of a long-term capital asset when they intend to claim reinvestment exemptions under provisions such as Section 54, Section 54EC, or Section 54F of the Income Tax Act, 1961.

Purpose and Need for CGAS

When a taxpayer sells a capital asset and is eligible for exemption by reinvesting the proceeds (or gains) in another specified asset or bonds within a defined time frame, any delay or partial reinvestment can lead to a situation where the taxpayer has not fully discharged their reinvestment obligation. To preserve the benefit of the exemption and avoid immediate taxation on the capital gains:

• Depositing in a CGAS:
  The taxpayer can deposit the funds in a designated CGAS account with authorized banks. This deposit acts as a temporary repository for the capital gains until the taxpayer completes the reinvestment as stipulated by the applicable exemption rule.

• Safeguard for Reinvestment:
  This mechanism allows the taxpayer to claim the benefit of exemption even if the reinvestment is completed at a later date within the prescribed time limit. It ensures that the capital gains are “earmarked” for the intended reinvestment, thereby deferring the tax liability on those gains.

• Relevant Statutory and Guideline Context

  While the term “Capital Gains Account Scheme” does not appear verbatim in the bare act, it is an integral part of the reinvestment framework described in sections such as:

  • Section 54:
    Provides for exemption on long-term capital gains from the sale of residential house property when the net sale proceeds are reinvested in another residential property.

  • Section 54EC:
    Offers exemption on long-term capital gains if the proceeds (or gains) are invested in specified bonds (such as those issued by NHAI or REC) within six months of the sale.

  • Section 54F:
    Pertains to the sale of capital assets (other than a residential house) where full reinvestment of the net sale proceeds in a residential property is required to claim an exemption.