Tax Query: Taxation in case of withdrawal from capital gain account before 2 years

I sold a residential property in June 2022, which was purchased long back in 1998. I had the intention to purchase another property (ready-built property) within the next two years and deposited the long term capital gain received from sale of property in SBI Capital gain account within two months from the date of sale of property.

In my Income Tax return for FY 22-23 (AY 23-24) the long term capital gain was declared and tax exemption was claimed under 54E as the amount was parked in the capital gain account. Now, unfortunately, due to certain circumstances, I am not able to buy a new property and want to withdraw the amount from my capital gain account. Please advise me whether any penal interest/any other payment needs to be paid if I pay the applicable tax with surcharge/cess in the current financial year, ie 2023-24. The bank needs a certificate from the concerned AO in this regard for disbursing the money.

Giri

As per Section 54 of the Income-Tax Act, 1961 (the Act), if the amount deposited in the Capital Gains Accounts Scheme (of the Central Government) is not utilised wholly or partly for the purchase of new property within two years from date of transfer of the original property, the amount not so utilised shall be chargeable under section 45(2) of the Act as capital gains.

The residential property, as stated by you, was sold in June 2022 and the two-year period expires in June 2024. Thus, accordingly, the amount of exemption claimed by you in the tax return for the previous year 2022-23 (Assessment year 2023-24) should be included as your income from capital gains in the previous year 2024-25 (AY 2025-26) tax return and the necessary tax of 20 per cent of the income plus applicable surcharge plus cess shall be payable accordingly.

You may note that no interest/penalty is levied if you are not able to purchase (or construct) the property after depositing the amount in the Capital Gains Account Scheme. This is brought to tax on expiry of the period allowed to purchase (or construct) the property. 

As per the Scheme, it is provided that at the time of closure of the account, the depositor will have to produce a specific authority letter/certificate from the Income Tax Officer of the respective jurisdiction.

The author is a practising chartered accountant

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