Capital Gains Account: Parking Sale Proceeds Until the New Home Is Paid For

Anyone who sells a flat, house or plot in Bangalore and wants to buy again faces a mismatch of calendars. The tax department expects a return within months, while buying or building a replacement can take years. A special bank account lets the sale profit wait safely until the new property is paid for. This note walks through how that account is used.

Two Calendars, One Gap

For the replacement property the law allows two years to buy a house and three years to build one. The return for the sale year, however, falls due soon after the financial year closes. A flat can change hands within weeks, while choosing and constructing the next home drags on.

A bank account scheme introduced by the central government in 1988 covers the gap. Profit lodged there before the filing date counts as reserved for the new property. The seller claims the exemption in that return and spends from the account as bills arrive.

The Last Day to Deposit

Two conditions apply together: the deposit precedes the filing of the return, and it falls on or before the last date allowed for filing. Individuals who have no business income usually have until 31 July, so the sale of a property in 2026-27 calls for a deposit by 31 July 2027, unless the government shifts the date.

Filing late and depositing afterwards endangers the exemption. The date is fixed by when the bank actually takes in the money and the form.

Which Sellers Are Affected

Most cases arise under two provisions. Section 54 relieves the long-term gain from selling a residential house. Section 54F relieves the gain from selling a plot or some other long-term asset, provided the entire net sale price is reinvested in a house. The Income-tax Act, 2025 renumbered them as 82 and 86 from 1 April 2026, yet the old numbers are still what people say.

The sum depends on the section. Under section 54, the portion of the gain not yet spent on the new house goes in. Under section 54F, it is the portion of the net sale price not yet spent, since the full price is what must be reinvested for a complete exemption.

If the replacement is already paid for before filing, nothing needs to be deposited. Buyers of capital gains bonds are also outside this route, as the bonds carry a six-month condition of their own.

Savings or Term: The Two Account Types

A seller may hold one type or both. They behave quite differently:

• Account A works like a savings account at the ordinary savings-account rate, and money comes out on an application whenever a payment is due
• Account B is a term deposit that either accumulates interest or pays it out periodically, at the bank's higher term rate
• Before any money leaves Account B it has to be shifted to Account A, and breaking the deposit early means a lower rate and a 1% penalty

Tax is cut at source from the interest of either type, and that interest is added to the depositor's income. A sensible split keeps the next few months of builder payments in A and the rest in B.

Setting It Up

Form A is lodged at a branch that the bank has authorised for this purpose. The documents are the PAN, proof of identity and address, and the registered sale deed. Pick a branch that is easy to reach, since the same branch deals with withdrawals and closure.

A change notified on 19 November 2025 altered the practice in four respects:

• Deposits are accepted by any banking company that the central government has notified, not only by public sector banks
• Money can arrive through net banking, UPI, IMPS, NEFT, RTGS or a card, in addition to a cheque or draft
• A statement in electronic form can replace the passbook
• From 1 April 2027 the request to close the account goes in online, authenticated by a digital signature or an electronic verification code

Each taxpayer holds the exemption separately, which means joint sellers each open an account for their own portion of the profit. One shared account will not do.

Spending From the Account

Form C is the request for money from Account A, and it can only be for buying or constructing the house. After the first withdrawal, Form D goes in with each later request to show where the earlier money went.

Any payment larger than Rs. 25,000 is made as a crossed demand draft favouring the party being paid, for example the builder or the person selling the new home. The recipient must use the funds within 60 days, and unspent money is returned to Account A.

Money in the account is meant for the house alone, so it cannot be pledged for a loan, and neither a cheque book nor a debit card is provided. Treat it as locked for that one purpose.

Winding Up

When the property is fully paid or the plan is abandoned, the depositor asks the bank to close the account by Form G. That request needs the written consent of the assessing officer. If the depositor has passed away, a nominee or legal heir files Form H instead.

Because the consent takes time, begin the process just after the final payment. The officer's letter also fixes the part of the deposit that actually went into the property.

If the Money Is Never Spent

The deposit postpones the liability and extinguishes it only if the house is acquired or built within the permitted period. Whatever remains is charged as a capital gain in the year when the three-year period after the sale runs out.

In the section 54F case, the tax is computed in the ratio of the unused amount to the sale price. A seller who is doubtful about buying again could find it easier to pay the tax or choose bonds, as the account binds the money to a single purpose.

Order of Work After Registration

The sequence below keeps the process tidy once the sale is registered:

1. Calculate how much of the profit is long-term gain and decide which section suits the asset
2. Treat the return's due date as the final day for the deposit
3. Subtract spending so far on the new home, and deposit what remains
4. Divide the sum between the two accounts to suit the payment schedule
5. Preserve demand letters, receipts and every Form D
6. Diarise the two-year and three-year limits and ask for closure after the final payment

The rules are no different for owners overseas, but NRI sellers should also provide for tax withheld by the buyer. Have a chartered accountant run the figures before depositing, since neither the sum nor the deadline can be changed once the money is in.