Investment limit capped at Rs 10 crore for capital gains account scheme from FY2023-24

In Budget 2023, the government set a ceiling of Rs 10 crore for the long-term capital gain tax deduction for reinvestment in residential properties under Sections 54 and 54F of the Income Tax Act. The same limit has been set for the Capital Gains Account Scheme. Earlier, there was no maximum limit set on the account. The new limit will be applicable from April 1, 2024, and will apply in relation to the assessment year 2024-25 and subsequent assessment years.

As per Explanatory memorandum for Budget 2023, “the provisions of sub-section (2) of section 54 and sub-section (4) of section 54F that deals with the deposit in the Capital Gains Account Scheme have also been amended. It is proposed to insert a proviso to provide that the provisions of subsection(2) of section 54 and sub-section (4) of section 54F, for the purpose of deposit in the Capital Gains Account Scheme, shall apply only to capital gains or net consideration, as the case may be, upto rupees 10 Crores.”

Also read: Investment in residential property for capital gains deduction capped at Rs 10 cr


“These amendments will take effect from the 1st day of April, 2024 and shall accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years,” according to the Budget 2023 memorandum.

Why was the limit set by the government
The main goals of sections 54 and 54F of the Act were to reduce the severe housing scarcity and stimulate the housing construction industry. Yet, it has been noticed that high-net-worth assessees are making claims of significant deductions under these provisions by purchasing extremely expensive residential properties. The fundamental purpose of these sections is being undermined by it.
Budget 2023 memorandum stated: “In order to prevent this, it is proposed to impose a limit on the maximum deduction that can be claimed by the assessee under section 54 and 54F to rupees ten crore. It has been provided that if the cost of the new asset purchased is more than rupees ten crore, the cost of such asset shall be deemed to be ten crores. This will limit the deduction under the two sections to ten crore rupees.”

What is a Capital Gains Account Scheme?

Capital gains refer to the money you make when you sell a capital asset. The Capital Gains Account System enables people to hold onto their capital gains in this account until they can be reinvest into the assets listed in Sections 54 and 54F of the Income Tax Act, 1961, thereby protecting their long-term capital gains.

When can you park funds in the Capital Gains Account Scheme?

When you sell a plot of land, a flat, or any other type of property, you will attract long term capital gains tax. However, if you intend to re-invest the proceeds in a residential property or another specified asset within the specified time frame, you can park the proceeds in Capital Gains Account, under the Capital Gains Account Scheme, 1988, and be eligible for long term capital gains tax exemption on the sale of capital assets.

Types of account
Two types of deposit accounts can be opened under this Scheme.
Deposit Account – A (i.e. Saving bank account),
Deposit account -B (i.e. term deposit accounts).
According to the IDBI Bank, “Rules applicable to saving and term deposit accounts are applicable to these accounts also. Deposit made under this account will be in the form of Term Deposits, with an option to retain the deposit either as "cumulative" i.e. similar to DRC Deposit [with interest reinvested] or as non-cumulative i.e. similar to Fixed Deposit.”

54 exemption
To qualify for the section 54 exemption, the taxpayer must either construct a new home within three years of the date of the transfer, or buy another house within one year of the date of the transfer or two years after that date. By withdrawing the funds from the designated account within the allotted time frames of two or three years, as appropriate, the new house may be purchased or built.

If the long-term capital gain from the transfer of a residential property is reinvested in a residential property, the deduction under section 54 of the Act is allowed. In accordance with section 54F of the Act, the deduction is payable on long-term capital gains resulting from the transfer of any long-term capital asset other than a residential property, provided that the net consideration is reinvested in a residential property.

Capital gains account period of deposit
According to the SBI website, “Period of Deposit not exceeding 2 to 3 years from the date of transfer of original asset as given below.

• Max 24 months - if capital gains is U/s 54, 54B, 54 F. (As declared in Form A by depositor)
• Max 36 months - if capital gains is U/s 54, 54 D, 54 F, 54 G & 54GB (As declared in Form A by depositor).

Closure of Gains Account Scheme
The depositor will need to present a special authorisation letter or certificate from the local income tax officer when closing any and all accounts. According to the conditions outlined in the letter of authorisation, the closure would be allowed.