What is the tax rate on capital gains made in 2023 but withdrawn from CGAS now? | Mint

I sold unlisted shares on 1 December 2023, with some long-term capital gains. I had deposited the money in a Capital Gains Account Scheme (CGAS) account by 31 July 2024 to use it under section 54F to buy some property. But now I don’t think I’ll be able to use it by 1 December 2025. I am neither going to construct any house. In between, the government has revised the LTCG taxation rate from 20% to 12.5%. My questions are: 1) Which rate of LTCG taxation will be applicable to me: the rate of FY24 or the rate of FY26? 2) Is there any limit on the surcharge of 15% on the sale of unlisted shares under the new guidelines? 3) How long will it take to get an approval from the assessing officer (AO) to withdraw the money from the CGAS account? What is the process for this?

—Name withheld on request

1) As per the income-tax provisions, any long-term capital gain (LTCG) arising on transfer of a capital asset is taxable in the previous year in which such transfer takes place. Section 54F of the Income-tax Act, 1961 allows a taxpayer to claim exemption on LTCG (arising on transfer of capital asset not being a residential house property, referred as ‘original asset’), if the net consideration is reinvested in one residential property (referred as ‘new asset’) in India, subject to satisfaction of other specified conditions. In order to claim the exemption, such reinvestment must be done as per timelines below:

-Purchase of a new asset: within one year before or two years after the date of transfer of the original asset;

– Construction new asset: Within three years from the date of transfer of the original asset.

If the taxpayer is unable to reinvest the net consideration in a new asset before the due date for filing the original tax return, the taxpayer may deposit the unutilized amount in the capital gains account (under CGAS) before filing their tax return and claim the exemption under section 54F.

However, in case the funds deposited in CGAS are not utilized for the prescribed purpose within the above-specified time period, then the LTCG not taxed earlier becomes taxable as the income of the fiscal year in which the specified period of three years expires.

In this case, as the date of transfer of the original asset (unlisted shares) was 1 December 2023, the period of three years to utilize the funds invested in the CGAS account will expire on 1 December 2026. Thus, even though you may not intend to purchase/construct the new asset currently, the reversal of the LTCG exemption claimed earlier in FY 2023-24 shall get triggered only upon expiry of the three-year period–FY 2026-27. In such a case, LTCG claimed as exempt in FY 2023-24 shall be considered as LTCG for FY 2026-27 and subject to tax in FY 2026-27.

As per the current provisions under Section 48 and Section 112 of the Income Tax Act, in the instant case, as the date of transfer of the original asset (unlisted shares) was 1 December 2023, which is before 23 July 2024 (when the LTCG tax rate was changed), the long-term capital gain will be taxed in FY 2026-27 at the earlier rate of 20% plus applicable surcharge and cess.

2) Effective FY 2023-24, the maximum surcharge leviable for LTCG on sale of unlisted shares is capped at 15% under both the tax regimes.

3) As per specified rule of Capital Account Scheme, 1988, to close the capital gain account, the individual depositor needs to make an application to the deposit office in the specified form along with the approval from the jurisdictional assessing officer of the depositor.

There are no prescribed instructions/guidelines for the manner and grant of this approval. One needs to submit an application before the AO, providing the detail of the capital asset sold, computation of LTCG earned from the sale of the capital asset, date of deposit of the amount in CGAS, date of expiry of the specified period for investment in the new property, along with corresponding backup documents. The AO may seek any additional information or clarification and process the application accordingly. Also, there is no prescribed timeline to complete the withdrawal of money after receiving the approval from the AO. This is more of a practical consideration and may vary from case to case.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.