NEW DELHI
:
Until now, withdrawing unutilized funds from the Capital Gains Account Scheme (CGAS) was a straightforward process. However, thanks to a change introduced in Budget 2024, what was once a convenient deferral tool could now become a potential tax trap.
From 23 July 2024 onwards, long-term capital gains (LTCG) from property are taxed at a rate of 12.5% without indexation. This change, while intended to simplify the capital gains regime, has created an unexpected complication for those who park their property sale proceeds in CGAS.
This is because properties bought before 23 July 2024 but sold after this date are subject to a dual option—the seller can choose between the lower of 12.5% without indexation or the old tax rate of 20% with indexation. But, this applies only in the year when the property is sold and not to CGAS withdrawals, ignoring the 20% with indexation option that may result in a lower tax outgo.
Why this matters
The CGAS helps taxpayers who have sold a long-term capital asset and want to claim tax exemption on the gains under Sections 54 or 54F but haven’t yet decided where to reinvest. Section 54 applies when you sell a residential property and want an exemption on the LTCG by using the gains to buy another house within two years or build one within three years.
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However, if the new property is not yet identified or the purchase is delayed, taxpayers can deposit the capital gains into a CGAS account before the tax return filing due date for the year in which the gains are realized. This deposit is treated as if the amount has already been reinvested, allowing the seller to claim exemption immediately while temporarily parking funds to make the actual investment later.
If the taxpayer ultimately fails to buy or construct a property within the allowed period of two to three years, the unutilized amount becomes taxable as LTCG in the year in which the withdrawal is made.
The new tax complication
For the Section 54 exemption, when capital gains from a property sale are parked in CGAS and later withdrawn, they are now being taxed at a flat 12.5% rate without indexation.
Taxpayers need to plan their CGAS deposits carefully, according to Ashish Karundia, founder of chartered accountant firm Ashish Karundia & Co. “Deposit the gains only if you’ve identified your next property and are sure about reinvestment. Otherwise, it’s better to pay the tax in the year of sale, as indexation generally reduces the effective tax outgo,” he said.
For instance, suppose you bought a house in 2020 for ₹1 crore and sold it in 2025 for ₹1.5 crore. After applying indexation, your taxable capital gain would be around ₹25 lakh, and the tax payable at 20% would be roughly ₹5 lakh. Under the new 12.5% rate without indexation, the entire ₹50 lakh gain becomes taxable, resulting in a higher tax of ₹6.25 lakh.
Now, if you had deposited the ₹50 lakh gain in a CGAS account and later withdrew it without using it to buy another house, the default 12.5% rate without indexation would apply, increasing your tax outgo by ₹1.25 lakh.
The CGAS continues to serve as a useful interim tool for reinvestment, but its tax deferral advantage has narrowed. With the new tax regime in place, the withdrawal of any unutilized amount deposited for the Section 54 exemption can translate into a higher-than-expected tax bill.
So make the deposit only when you’re confident about reinvesting in another house. Otherwise, paying the indexed tax upfront in the year of sale is likely to be more cost-effective.
