Unutilized Capital Gains: Understanding the Tax Implications After 3 Years
Dwaraki Bindiganavile and his wife are facing a common dilemma for property sellers: how will their unutilized long-term capital gains (LTCG) in a Capital Gains Account be taxed after the three-year window closes in August 2025?
In August 2022, Mr. Dwaraki and his wife sold a joint property, realizing an LTCG of ₹1.34 crore after indexation. They strategically invested ₹50 lakh each in REC bonds and deposited the remaining ₹17.3 lakh each (total ₹34.6 lakh) into a Capital Gains Account under the Capital Gains Account Scheme (CGAS). This scheme allows individuals to temporarily deposit capital gains to avail tax exemption, provided the funds are reinvested in a new residential property within a specified period (2 years for purchase, 3 years for construction).
However, as the three-year deadline approaches this August, Mr. Dwaraki has not been able to reinvest the funds. He reached out to us, concerned about the tax liability that will arise upon closing these accounts.
Expert Opinion from CA Dr. Suresh Surana:
CA Dr. Suresh Surana clarifies the tax implications for Mr. Dwaraki and his wife:
The initial sale of the property in August 2022 generated an LTCG of ₹134.60 lakh, equally attributable to both co-owners (₹67.30 lakh each). The ₹100 lakh (₹50 lakh each) invested in REC Bonds under Section 54EC within six months of the transfer is exempt from capital gains tax.
The remaining ₹34.60 lakh (₹17.30 lakh each) was deposited into the CGAS, presumably for reinvestment under Section 54. However, Section 54 mandates that the investment in a new residential property must occur within two years (for purchase) or three years (for construction) from the date of the original property transfer.
Crucially, if the amount in the Capital Gains Account remains unutilized by the expiry of this period (August 2025 in this case), the unutilized portion is “deemed” to be long-term capital gains in the financial year the period expires.
Therefore, if Mr. Dwaraki and his wife close their capital gains accounts after August 2025 without utilizing the funds for a new property, the entire ₹34.60 lakh (₹17.30 lakh each) will become taxable as long-term capital gains in their respective hands for the financial year 2025-26 (Assessment Year 2026-27).
Understanding the Tax Calculation:
Given that the original property was sold in August 2022 (before July 23, 2024), and the LTCG of ₹34.6 lakh was calculated after indexation, the applicable tax rate for this deemed LTCG will be 20%.
Here’s an estimated tax calculation (excluding surcharge and interest on CGAS):
- Taxable LTCG: ₹34.60 lakh
- Tax @ 20%: ₹34.60 lakh * 20% = ₹6.92 lakh
- Health and Education Cess: A 4% cess will be applied to the tax amount.
- 4% of ₹6.92 lakh = ₹0.2768 lakh (₹27,680)
- Estimated Total Tax (Excluding Surcharge): ₹6.92 lakh + ₹0.2768 lakh = ₹7.1968 lakh
Important Considerations:
- Surcharge: Surcharge may be applicable on the income tax if their total taxable income (including this deemed LTCG and other income) exceeds certain thresholds (e.g., ₹50 lakh or ₹1 crore).
- Interest on CGAS: Any interest earned on the deposits in the Capital Gains Account is also taxable income for the respective financial years it was earned. TDS would generally have been deducted on this interest if it exceeded the specified threshold.
- Professional Advice Recommended: This is an estimated calculation to illustrate the taxation. Tax laws are intricate, and individual circumstances can significantly impact the final tax liability. It is strongly advised that Mr. Dwaraki and his wife consult a qualified tax planner or chartered accountant to get a precise calculation and ensure full compliance.