Including Whether Funds from CGAS Can Be Used for Investment in 54EC Bonds
The Capital Gains Account Scheme, 1988 (CGAS) is one of the most vital tax-planning mechanisms under the Income-tax Act, 1961. It allows taxpayers to defer capital gains tax liability while preserving eligibility for exemptions under Sections 54 to 54GB, in cases where reinvestment in a new asset cannot be completed before the due date of filing the income-tax return.
This article serves as a comprehensive procedural and legal reference for tax professionals and assesses the possibility of investing CGAS funds into 54EC bonds, an area of frequent confusion and litigation.
The CGAS was introduced via Notification No. GSR 724(E), dated 22 June 1988, under the enabling powers of Sections 54(2), 54B(2), 54D(2), 54F(4) and 54G(2). It resolves the timing gap between realization of capital gains and reinvestment readiness by permitting deposit of such gains in a notified account with an authorized bank, ensuring that exemption claims remain valid.
Applicable Exemption Sections
The scheme supports exemptions under the following provisions:
Sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA, and 54GB.
The most common use arises for Sections 54 (house property), 54F (any long-term asset into residential property), and 54B (agricultural land).
Account Types and Features
Type A – Savings Deposit Account
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Operates similar to a regular savings account with a passbook.
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Allows multiple withdrawals and deposits.
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Suitable for taxpayers planning construction or staggered payments.
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Interest is credited periodically at savings-account rates.
Type B – Term Deposit Account
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Works like a fixed deposit, with higher interest and defined maturity (up to 3 years).
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Appropriate when reinvestment has a clear timeline.
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Withdrawal before maturity requires Assessing Officer’s approval via Form C.
CGAS Forms and Procedural Framework
| Purpose | Form No. | Authority / Action |
|---|---|---|
| Opening account | Form A | Bank |
| Conversion (A ↔ B) | Form B | Bank |
| Withdrawal request | Form C | Bank (with AO approval, if needed) |
| Utilization statement | Form D | Bank |
| Closure request | Form G | Assessing Officer |
| Withdrawal by nominee (after death) | Form H | Assessing Officer |
Compliance Timeline and Key Conditions
| Action | Time Limit | Relevant Section |
|---|---|---|
| Deposit unutilized capital gain | Before due date under Section 139(1) | 54(2), 54F(4) |
| Utilize for purchase/construction | Within 2 or 3 years (depending on section) | Relevant section |
| File proof of deposit/utilization | With ITR or during assessment | CBDT Circular No. 743/1996 |
| Non-utilization of amount | Taxable in year of expiry | 54(2), 54F(4) |
Can Funds Deposited in CGAS Be Used to Invest in Section 54EC Bonds?
This question frequently arises when taxpayers have already parked unutilized capital gains in CGAS but later wish to subscribe to 54EC capital gains bonds (NHAI, REC, PFC, etc.) within the prescribed six-month window.
Legal Basis
Section 54EC(1) requires that the capital gains (not necessarily the exact sale proceeds) be invested in specified bonds within six months from the date of transfer.
The CGAS notification allows deposits for exemption purposes under Sections 54 to 54GB, but subject to each section’s individual time-limit and conditions.
Hence, if the 54EC six-month investment window remains open, a taxpayer may validly withdraw funds from CGAS (through Form C) and invest in 54EC bonds. The investment date will be the determining factor—not the CGAS deposit date.
Judicial and Departmental Interpretations
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CBDT Circular No. 359 (10 May 1983) clarified that the date of investment, not the source of funds, is decisive for exemption.
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ITO v. K.C. Gopalan (2000) 162 CTR (Ker) held that exemption cannot be denied because reinvestment was not made directly from the sale consideration.
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ITO v. M. Venkata Subba Reddy (ITAT Hyderabad) upheld that funds withdrawn from CGAS and invested in 54EC bonds within six months constitute valid compliance.
Practical Implications
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Investment in 54EC bonds out of CGAS deposits is valid only if made within six months from the date of transfer.
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If the six-month period has expired, exemption under Section 54EC becomes inoperative, even if the amount remains in CGAS.
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The bank must permit withdrawal from the CGAS account through Form C, supported by the proposed bond investment proof.
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Partial claim bifurcation is permissible: for example, part of the capital gains under Section 54EC (bond investment) and the remaining under Section 54 or 54F (property acquisition).
Exclusivity Principle
The same quantum of capital gains cannot simultaneously claim dual exemption under Sections 54 and 54EC. The taxpayer may, however, allocate different portions of the total gain between eligible sections.
Closure, Withdrawal, and Reporting Protocol
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Closure of the CGAS account is allowed only upon Assessing Officer’s approval via Form G.
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Premature withdrawal for purposes other than those eligible under the exemption leads to taxability of the withdrawn amount as capital gains in the year of default.
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Interest on CGAS deposits is taxable as Income from Other Sources, not exempt.
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Utilization statements (Form D) must be submitted within 60 days from the end of the financial year.
Key Risk and Audit Checkpoints
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Missed deposit or investment deadlines cause automatic lapse of exemption.
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Mismatch between ITR disclosure and bank Form D often triggers assessment scrutiny.
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Failure to close or utilize CGAS within the statutory period leads to taxability in the following year.
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Assessing Officer’s approval is mandatory for all premature withdrawals and closure requests.
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Documentation (passbook, withdrawal proofs, 54EC allotment letter) should be preserved for six years post-assessment.
Practical Compliance Flow
| Stage | Action Required | Reference / Form |
|---|---|---|
| Transfer of capital asset | Compute long-term or short-term capital gains | Sections 45, 48 |
| Unable to reinvest before ITR due date | Deposit gains into CGAS | Section 54(2) |
| Reinvestment in property or bonds | Withdraw via Form C | Rule 7(1) |
| Submit annual utilization statement | File Form D with bank | Rule 7(2) |
| Close account after completion | Apply through Form G (AO approval) | Rule 7(3) |
Conclusion
The Capital Gains Account Scheme functions as a statutory safety net ensuring that taxpayers do not lose exemption merely due to reinvestment timing constraints. Once deposited, the amount retains its character as capital gains, allowing lawful reinvestment in 54EC bonds, subject to the six-month limitation from the date of transfer.
Accurate documentation, timely utilization, and careful coordination between Sections 54, 54F, and 54EC are essential to sustain exemption claims. For professionals, maintaining a clear audit trail of deposits, withdrawals, and reinvestments remains the cornerstone of a defensible and compliant capital gains strategy.
