“Boss, there is this thing I need to discuss with you if you have some time.” Mansukh, my garment dealer friend, came to see me, ostensibly to finalise his tax returns.
Here’s how you can use the Capital Gains Account Scheme to your advantage
“Boss, there is this thing I need to discuss with you if you have some time.” Mansukh, my garment dealer friend, came to see me, ostensibly to finalise his tax returns. Busy with some numbers, I didn’t pay much attention to him. “Yes, what is it?” I asked without even looking up.
“I just wanted to know the capital gains tax structure.”
Mansukh, an astute businessman, was always thinking of insidious ways - either to make money or to prevent the government from laying its hands on his. Usually, I was the devil’s advocate. Though his question was simple and right up my alley, I couldn’t help but feel something was amiss somewhere. Mansukh knew this. Then why was he asking me?
In any case, I started, “Long-term capital gains are tax-free for shares and equity-oriented mutual funds. However for......” He held up a hand, taking up from where I had left off. “However for property, the rate is 20% after indexation of cost. If a residential space is purchased before one year or after two years or constructed within three years of sale, capital gains are exempt from tax. Then there is the Capital Gains Account Scheme (CGAS). This scheme is available with some banks wherein one has to deposit the capital gains. If this deposit is utilised for buying property within the specified period, no advance tax is required to be paid on the gains.”
There you go. I thought he knew the answer. Then was he testing my knowledge? I didn’t like this one bit. “Mansukh,” it required an effort not to raise my voice, “If you already know....” He pretended not to have heard me and continued the monologue, “The deposit in the CGAS has to be made by the investor before the last date of filing his tax returns for the relevant year.” He paused, pretending to be out of breath.
For a moment I suspected he had come just to waste my time. But that was unlike Mansukh. He definitely had something up his sleeve. I thought it best to let him play his piece.
“Suppose I sold my residential house in April 2008. I intend to construct a house within three years, that is, before April 2011. So, as per the law, can I not take the liberty of depositing the sale proceeds in a bank under CGAS as late as 31.7.2009, which is the last date for filing my IT returns corresponding to the year 2008-09?”
“Big deal!” I retorted. “All you are getting is liquidity for 15 months.”
Ignoring my sarcasm, he excitedly continued, “Credit, boss, credit. Not liquidity. The money actually should have gone to the government. I am merely borrowing it and what’s more - I am being paid for it also. Don’t you see? For 15 months I can freely utilise the money, including what I would have otherwise paid as advance tax. Then, in July 2009, under CGAS, I buy a two-year bank fixed deposit. Now, suppose at the end of this period, I do not utilise even a rupee of this amount for constructing the house. What are the consequences? I have to pay capital gains tax in the year 2011-12. The first date for payment of advance tax is 30.9.2011 by which the FD conveniently matures to provide me with the required funds!!”
I was impressed. Mansukh certainly had a point here. Before 1993, non-utilisation of the deposit invited a severe penalty. But now it was no longer so.
Mansukh was grinning. “There is no punishment, boss. In fact, there is a reward - in terms of earning interest on the CGAS account. Also, the situation allows you to pull off another trick. Can you guess what that is?” I could only shake my head. “As I said earlier, the tax would be paid only in 2011. Doesn’t that give you a hint?” I was still blank. Mansukh’s eyes were gleaming. “Boss, since I have to pay tax only in 2011-12, can I not use the higher cost inflation index pertaining to that year?”
I was stunned. How could I not have thought of this simple idea?
But I had to get some of my own back. Though I myself didn’t believe much in what I was saying, I went ahead. “But you are manipulating affairs. It is unethical...” It was a mistake. No sooner had I uttered these words than he snapped back. “Every taxpayer has a constitutional right to arrange his financial affairs as per his or her own likes or dislikes! How do ethics figure here?”
I sighed resignedly. He had more than a point there.
But Mansukh had not finished. He had reserved the best for the last, “Boss, I have one more difficulty. Since I have not utilised even one rupee out of the CGAS account, it will be treated as long-term capital gains for 2011-12 and taxed accordingly. In which case, can I not invest in 54EC bonds to save tax on these capital gains? Now when does the period of six months get over?”
Even there he was earning some credit period. Triumphantly, he announced, “See, when legislation itself has different interpretations, it is only I who win. Thanks a million for your time. I learnt a lot today.”
But I knew who had learnt from whom.
sandeep.shanbhag@gmail.com
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