The country's biggest bank, the State Bank of India, offers to keep your hard earned money away from the reach of the taxman legally -- until you reinvest it.
SBI Capgains Plus, the bank's re-packaged capital gain tax exemption plan, comes with lures such as the absence of any lock-in period, a slightly higher interest rate compared to the capital gain tax saving bonds and SBI Life's 'Super Suraksha' life cover at a lower premium.
The bank first launched the scheme in the late 80s when the tax and investor awareness was at a low, said a senior official of the SBI.
Subsequently, the scheme went largely unnoticed. With the economic scenario undergoing a sea change and the taxmen scrutinising transactions involving residential properties, industrial land, plants and machinery, harried customers now want to protect their capital gains until they decide on a new investment.
"Popular demand prompted us to relaunch the revamped scheme this September. We are primarily targeting owners of residential and industrial properties who want to sell existing premises in search of new ones," a senior bank official said.
"You are selling a two-room house at a premium and want to buy a bigger house. But you haven't decided the location and know that it would take some time before zeroing in on a new property. But the I-T official comes knocking on your door because if you haven't re-invested your money within a year, your capital gain is liable to be taxed," the official said.
The government taxes long-term capital gains at 20 per cent for individuals and foreign firms and 30 per cent for domestic companies. "Section 54EC of the I-T Act, 1961, provides relief from capital gains tax.
Under this, gains on transfer of a long-term capital asset can be exempted from tax if the money is invested in bonds of institutions such as Nabard, the Rural Electrification Corporation, Sidbi or the National Highway Authority India.
"These bonds are redeemable after three years and for this, one has to invest in these bonds within six months from the date of transfer of the original asset," the officials said.
"This (investing in bonds) will mean your money is locked in for three years. If you want to buy a new property one or two years after transferring the original asset, you will have to either wait or look for alternative funds," he said.
It is here that the SBI plan comes handy. The proceeds of the sale of the capital asset can be parked in the fixed deposit scheme under the Capgains Plus plan at an interest rate marginally higher than what bonds under Section 54 EC would fetch. The interest rate under the plan is up to 6 per cent. However, it will be taxed at prevailing rates.
"Once you take a final decision on the property you want to reinvest in, you can opt for an exit from the plan at any stage, but you need to get a certificate of consent from the assessment officer," he said.
However, unlike the bonds under 54 EC, the depositor cannot put the money in a different kind of asset. The plan stipulates that re-investment should be made on the specified asset only.
Nabard chief general manger Madan Mohan said: "This is quite different from our bonds which offer exemption under Section 54 EC. After the lock-in period or on the maturity of the bonds, the investor is free to put in his money in any kind of asset, which is a bigger advantage. However, the interest on the bond is taxable."
Says SBI assistant general manager Sarang Rajan, "We are offering the plan to park the funds until an investor makes up his mind on a new investment."
This is particularly useful for residential property owners who have to look into various aspects such as the location, children's education and job demands before taking a final decision on buying a new house."
"We realised that there is a good market for instruments offering capital gain tax shield. Though we launched the scheme much earlier, the customers as well as most of the bank staff were not fully aware of it.
"Now, we have made the application form simple and revamped the scheme. Now the scheme is available at all computerised branches, except those in the rural areas," Rajan said.