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Tax Planning Idea by Shanbag

Started by bhaskar rao, May 22, 2008, 03:47:02 PM

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bhaskar rao


I read article by Shanbag of DNA where he has given fantastic idea for tax planning. I want to implement for clients. However, is there loophole or points missed by author which can put clients in trouble? Please advise urgently. I have analysed the article as follows:

Cap gain for sale of 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. 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.

(1) Assessee sold residential house in April 2008. Assessee intend to construct a house within three years, that is, before April 2011. So, as per the law, assessee can 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 Assessee's IT returns corresponding to the year 2008-09.

(2) The money actually should have gone to the government. Assessee is merely borrowing it and what's more - Assessee is being paid for it also. For 15 months Assessee can freely utilise the money, including what Assessee would have otherwise paid as advance tax.

(3) In July 2009, under CGAS, Assessee buy a two-year bank fixed deposit. Now, suppose at the end of this period, Assessee do not utilise even a rupee of this amount for constructing the house. What are the consequences? Assessee 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 Assessee with the required funds.

(4) There is no punishment. In fact, there is a reward - in terms of earning interest on the CGAS account.

(5) The situation allows you to pull off another trick. The tax would be paid only in 2011. Since Assessee have to pay tax only in 2011-12, Assessee can use the higher cost inflation index pertaining to that year.

(6) Since Assessee 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, Assessee can invest in 54EC bonds to save tax on these capital gains. He gets further period of six months.

Yours faithfully,

Bhaskar Rao, ITP.


Dear Mr.Bhaskar Rao,

In my view this option is available to an assessee but practically the money will have a better opportunity cost than keeping it in the Capital Gain Scheme, which needs to be examined before this decison is taken. As far as indexation is concerned no further benifit will be available as the amount claimed as exempt will be taxed after expiry of the relevant period. The benifit U/s 54EC will not be available as the investment is required to be made with in six months from the date of transfer of Asset.

Best Regards,



Although the scheme seems to be good, one aspect which should be looked into is whether the exemption u/s. 54EC would be available in 2011 as the income taxed in 2011 is the income deemed to be the capital gains relating to long term capital asset. The exemption u/s., 54EC is only in respect of income arising as a result of transfer of LTC asset. Hence, the exemption can be a litigative issue. Moreover, it is correctly said that the money could have better oppotunity cost as the CGAS would fetch income only of 4% approx.

bhaskar rao

Dear Sirs,

Thank you all very much for very valuable advice. I am soory for the late reply as I could nt find article link. Now I have it here: www.dnaindia.com/mobile/report.asp?n=1165583

I am thankful for valuable advice of learned readers.

Yours faithfully,

Bhaskar Rao, ITP.