Deposited ₹34.6 lakh LTCG in Capital Gains Account. How will it be taxed after 3 years?

The capital gains account allows property sellers to deposit their underutilised capital gains for up to three years and avail exemption from tax on the capital gains.

No tax applies when you reinvest the gains from selling a residential property in another residential property before the ITR filing due date. However, in a situation where the time for reinvestment is longer than the tax filing due date, you can avail tax exemption by depositing the LTCG in a capital gains account of a bank.

Mr Dwaraki, however, has not been able to reinvest the amount in any other property, and the capital gains account is going to complete three years in August. He is now wondering about the tax liability that may arise after he closes both capital gain accounts.

In an email, Mr Dwaraki shared his concerns with us as follows:

"I sold a property in August 2022, and after indexation, a sum of ₹134.60 lakh was arrived as LTCG (joint property with wife), sum of ₹100 lakh (₹50 lakh each) has been invested in REC Bonds. The balance ₹34.60 lakh (₹17.30 lakh each) is kept in capital gain savings accounts. Now it is 3 years by August. Can you please tell as to how much tax is payable by us if we close the capital gain account?

The sale of the immovable property in August 2022 resulted in a total long-term capital gain (LTCG) of ₹134.60 lakh, which is jointly attributable to both co-owners (husband and wife) at ₹67.30 lakh each. Out of the total LTCG, an amount of ₹100 lakh (₹50 lakh per co-owner) was invested in bonds issued by the Rural Electrification Corporation (REC) under Section 54EC of the Income Tax Act within the prescribed time limit of six months from the date of transfer. This investment qualifies for exemption from capital gains tax to that extent.

The balance capital gain of ₹34.60 lakh (₹17.30 lakh each) was deposited into a Capital Gains Account Scheme (CGAS), presumably with the intent to utilise the amount for the purchase or construction of a new residential property under Section 54.

However, as per the provisions of Section 54, the exemption is conditional upon the investment being made within 2 years (for purchase) or 3 years (for construction) from the date of transfer. If the amount remains unutilised upon the expiry of the said period i.e., by August 2025 in this case, the unutilised portion is deemed to be long-term capital gains in the year in which the specified period expires.

Accordingly, if the capital gain account is closed after the expiry of 3 years without utilisation for the specified purpose, the unutilised amount of ₹34.60 lakh (₹17.30 lakh each) will become taxable as long-term capital gains in the hands of the respective co-owners in the financial year 2025–26 (assessment year 2026–27).

Additional details

Any interest earned on deposits in a capital gains account is also taxable, and TDS is generally deducted if the interest is above a certain threshold.

The applicable tax rate for property sold before July 23, 2024, is the lower of

• 20% plus indexation, or

• 12.5% without indexation.

Since the LTCG of ₹34.6 lakh was arrived at after considering indexation, the applicable tax should be 20% of ₹34.6 lakh, which is around ₹6.92 lakh, excluding cess and surcharge.

Please note that the above is a rough estimate to explain the capital gain account taxation. It would be better to consult a tax planner, preferably a chartered accountant, to find out the total tax liability.