[Analysis] Union Budget 2025-26 | Capital Gains Deposit Scheme – Judicial Rulings | Budget Expectations | Taxpayer Implications

The Capital Gains Deposit Scheme (CGDS) is a program the Government of India introduced under Sections 54, 54B, 54D, 54F, and 54G of the Income-tax Act, 1961. It allows taxpayers to temporarily park capital gains in a designated account to claim tax exemptions when they cannot immediately reinvest the gains into specified assets. This scheme is essential for taxpayers looking to comply with reinvestment conditions while avoiding immediate tax liabilities on capital gains.

Table of Contents

1. Introduction
2. What is Section 50C?
3. Judicial Rulings
4. Expectations from Union Budget 2025

1. Introduction

When a person sells an immovable property as a capital asset, the difference between the sale price and purchase cost, including any expenses, is treated as capital gains. To reduce tax liability, the Income-tax Act provides exemptions under Sections 54, 54F, etc., to taxpayers who reinvest the net sales consideration or capital gains in specified ways.

A taxpayer is granted a window of up to 3 years to reinvest in the new assets, which enables him to qualify for exemptions under Sections 54, 54F, and others. Should the taxpayer not adhere to this stipulated timeline for investment, the Income-tax Department could face challenges in collecting the tax on the resulting capital gains. Therefore, taxpayers can deposit the uninvested amount into the special Capital Gains Deposit Account in the authorised bank. This deposit ensures exemption even if the taxpayer fails to invest before the deadline for filing the income tax return. The amount invested in such deposit accounts is considered for computation of capital gains exemption.

The Capital Gains Deposit Account is a financial instrument designed to facilitate tax compliance and exemption of capital gains. This unique scheme allows taxpayers to deposit the uninvested amount in this special account, ensuring adherence to prescribed timelines for reinvesting in new eligible assets. However, a question often hounds taxpayers is whether the deposit should be based on the actual sale consideration received or the stamp duty value determined under Section 50C of the IT Act.

2. What is Section 50C?

Section 50C is a deeming provision under the IT Act. It provides that if the consideration for transferring land or a building is less than the stamp duty value set by the Stamp Valuation Authority, then the stamp duty value is deemed the full consideration for calculating capital gains. The difficulty arises when the Assessing Officer treats this deemed consideration as the amount to be deposited in the Capital Gains Deposit Account. The deeming provision to consider the higher amount for the computation of the capital gains should not be applied while determining the amount to be deposited in the special account.

This question is crucial, as deposits made under the special account directly impact the amount of capital gain exemptions available. Further, the taxpayers may encounter significant financial difficulties, potentially needing to secure additional funds beyond the actual sale proceeds they received on the sale transaction.

Let’s understand this with a practical example.

A property with an overhead high-tension wire is sold for Rs. 60 lakhs. However, the stamp duty value of such property is Rs. 90 lakhs. According to Section 50C, the sale value for capital gains calculation is deemed to be Rs. 90 lakhs. The assessee deposits Rs. 60 lakhs in the special account, but the Assessing Officer contends that Rs. 90 lakhs should have been deposited to claim the complete exemption under Section 54 or 54F.

The current provisions of the Income-tax Act lack clarity on this matter.

3. Judicial Rulings

The Delhi and Kolkata Tribunals have clarified the application of Section 50C in the context of the special deposit account and Section 54F exemption.

The Delhi ITAT held that deposits in the special account should be based on actual sale consideration, as the deeming fiction of Section 50C does not govern Section 54F exemptions.

The Kolkata ITAT also ruled that the deeming fiction of Section 50C for computing the ‘full value of consideration’ is to be applied only to the capital gains calculations. This provision cannot be applied while computing exemption under Section 54F.

4. Expectations from Union Budget 2025

As Union Budget 2025 approaches, it is strongly recommended that the government remove this ambiguity in the Income-tax Act. Taxpayers should not be compelled to deposit the amount in a special account based on the higher stamp duty value, which should never have been the legislative intent. A taxpayer cannot be forced to deposit the amount he never received.

The actual sale consideration should serve as the foundation for the deposit in the special account. This will facilitate taxpayers’ compliance with the provisions and enable them to claim capital gains exemptions without incurring excessive financial burdens.