Abhimanyu is a software professional who is employed in an IT company in Gurgaon. He inherited a residential flat in Chennai from his mother in June 2018. Since the flat was old and maintaining it was becoming difficult, he decided to sell it and re-invest the amount in a new flat. He sold the old flat Nov 2019 and the transaction resulted in a long term capital gain of Rs.80 Lacs. Since Abhimanyu had not identified another property, he had parked the capital gain in a CGAS (Capital Gain Account Scheme) savings account in Jan 2020. While preparing his return of income for FY 2019-20, Abhimanyu notices that the CGAS account had earned him an interest on the amount invested. Abhimanyu is of the opinion that the CGAS account was opened as a tax saving measure and hence any interest credited in that account is not taxable. Is he correct?
Any capital gain arising out of sale of a residential house is exempt if the amount of capital gain is re-invested in another new house property. (Sec 54 of the Income Tax Act)
While the Income Tax Act requires an assessee to re-invest in a new house for claiming exemption, it allows the assessee to set aside and deposit the amount of capital gains in a separate CGAS account if the new property is not identified before filing return of income for the FY (during which the old house was sold).
In this case there are two transactions which have separate source of income. First one being the capital gains and the second one being the interest accrued on a CGAS account.
While the CGAS account was opened as a tax saving measure, the account is like any other savings bank account which will earn interest on the balance.
Hence the interest earned by Abhimanyu from the CGAS account will have to be offered as income from other sources while preparing the return of income for FY 2019-20.
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