Section 85, Income-tax Act 2025: Capital gains not to be charged on investment in certain bonds

What changed when Section 54EC became Section 85?

The section number and one word of the text. The Income-tax Act 2025 carries the old Section 54EC forward as Section 85, titled "Capital gains not to be charged on investment in certain bonds", and keeps every figure: the ₹50 lakh cap, the six-month window and the five-year lock-in all stand. If you have read about parking a property gain in REC or PFC bonds to save tax, this is that section.

The one substantive edit is a tightening. The 1961 Act spoke of a gain on a "long-term capital asset"; Section 85 speaks of a "long-term capital gain". The effect is that a depreciable building, whose gain the law deems short-term under the block-of-assets rule, no longer qualifies. Only a gain that is genuinely long-term, on land or a building held more than 24 months, can go into these bonds.

The route itself is unchanged, and it is worth seeing whole: sell the property, move the gain into notified bonds inside six months, leave the bonds alone for five years, and the tax on the invested gain disappears.

The 2025-Act number (85) and its title are cross-checked against multiple published copies of the enacted Act.†

Which capital gains qualify for Section 85?

Only a long-term gain on land or a building, or both. This is the narrowest part of the relief, and where most failed claims come from: a gain on shares, mutual funds, gold, jewellery or a business's plant does not qualify, however long you held it. The asset sold must be immovable property, and it must have been held long enough to count as long-term.

For land and buildings the long-term line is 24 months. Sell within 24 months of buying and the gain is short-term, taxed at your slab, with no Section 85 route open to it. Sell after 24 months and the gain is long-term and eligible.

Two tests both have to be met:

• The asset is land or a building (or both). A plot, a house, a shop, an office, non-agricultural land: all count. Tenancy rights, shares in a housing company and movable assets do not.
• The gain is long-term, meaning the property was held for more than 24 months. A depreciable building used in a business is excluded even after long holding, because its gain is treated as short-term.

The switch from "long-term capital asset" to "long-term capital gain" is the one wording change from Section 54EC, read from published copies of the enacted Act.†

Which bonds count, and who issues them?

Only bonds the Central Government has notified for this purpose, redeemable after five years. Three public-sector issuers offer them today: the Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and Indian Railway Finance Corporation (IRFC). The National Highways Authority (NHAI), long a fourth issuer, stopped issuing these bonds in 2022.

The bonds are plain and deliberately dull. They are AAA-rated, backed by their public-sector issuers, and pay a fixed rate of interest once a year, currently around 5.25%. That interest is fully taxable at your slab rate and no tax is deducted at source on it, so you must declare it yourself each year. The exemption applies to the money you invest, never to the interest it earns.

You buy them directly from the issuer or through the banks and brokers that collect the applications, in physical or demat form. Each bond has a face value of ₹10,000, and the most that earns the exemption is ₹50 lakh, which is 500 bonds.

Issuer identities and the current coupon are market facts as at mid-2026 and can change; the notified list is maintained by the government.†

How much gain can you shelter: the ₹50 lakh cap and the two-year trap

₹50 lakh, and the ceiling is cleverer than it first looks. In any one financial year you can invest at most ₹50 lakh in these bonds for the exemption. Invest more and the excess simply earns interest with no tax benefit. So a ₹50 lakh gain can be sheltered in full; a larger gain cannot be, whatever you do.

The trap is the second limit, and it catches people whose six-month window straddles 31 March. The law also caps the total you can invest across the financial year of the sale and the following financial year at ₹50 lakh. Without this rule, someone who sold in February could invest ₹50 lakh before 31 March and another ₹50 lakh in April, still inside six months, and shelter ₹1 crore. The aggregate ₹50 lakh cap closes that door: splitting the investment across two years does not double the relief.

The figure puts numbers on it. A ₹90 lakh gain, with ₹50 lakh invested in March and ₹40 lakh in May, shelters only ₹50 lakh. The other ₹40 lakh stays taxable even though it was invested within six months and within the second year's own ₹50 lakh limit.

Both the ₹50 lakh per-year cap and the ₹50 lakh two-year aggregate cap carry over from Section 54EC unchanged.†

How to calculate the exemption, step by step

The exemption is always the lower of two things: the gain you made and the amount you invest, capped at ₹50 lakh. If the gain and the investment both sit at or below ₹50 lakh and match each other, the gain is fully exempt and there is nothing left to tax. If the gain is larger than what you invest, or larger than ₹50 lakh, the shortfall is taxed at the long-term rate. Work it out in four steps:

For the property sale:

• Work out the long-term capital gain on the land or building: sale value, less the cost (indexed where indexation is used) and any improvement cost, less transfer expenses like brokerage.
• Decide how much of that gain to put into the bonds, within six months of the sale and within the ₹50 lakh limits.
• The exemption is the amount invested, but never more than the gain and never more than ₹50 lakh.
• Any gain left over is taxed as a long-term capital gain: at 12.5% without indexation, or, for property bought before 23 July 2024, at 20% with indexation where that works out lower, plus 4% cess.

The 12.5% and 20%-with-indexation long-term rates on property are the Budget 2024 position; the choice between the two is open only for property acquired before 23 July 2024.

The five-year lock-in and the four ways to break it

Five years, counted from the date the bonds are allotted, and the lock-in is strict. The relief is a bargain struck on one condition: the money stays put. Hold the bonds for the full five years and the exempted gain is gone for good. Break the condition and the gain you had sheltered comes straight back as taxable income in the year you break it.

There is no partial credit either. Break the lock-in and the entire gain you exempted is taxed again, not a pro-rated slice for the years remaining. Because the revived gain is long-term, you could in principle shelter it once more by reinvesting, but the clean course is to leave the bonds untouched until they mature. The four moves below all count as breaking it:

Each of these revives the gain and taxes it as a long-term capital gain of that later year:

• Selling or transferring the bonds before five years are up.
• Converting the bonds into money before five years, including redeeming them early where that is possible.
• Taking a loan or an advance against the bonds. The law treats pledging them as security as a transfer, so a loan can undo the whole exemption.
• Any other act that amounts to converting the investment into money before the term is over.

The loan trap is the one people miss: pledging the bonds for any borrowing is treated as selling them.

Section 85 bonds or a new house: which shelter fits?

Bonds are not the only way to save tax on a property gain, and often not the cheapest. The other main route rolls the gain into residential property: the successors to the old Sections 54 and 54F let you reinvest a house sale, or any long-term gain, into a new home instead of bonds, with no ₹50 lakh cap. Which one fits depends on what you want your money doing for the next five years.

The house route suits a gain well above ₹50 lakh (bonds cap out, a house purchase does not), someone who actually wants the property, or an investor who would rather hold an appreciating asset than a 5.25% bond. Sellers with a large gain often use both: ₹50 lakh into Section 85 bonds and the rest into a house, covering more of the gain than either route could alone. Run your own figures in the calculator linked below before deciding.

Section 85 bonds are the better pick when:

• Your gain is at or below ₹50 lakh, so the cap does not bite.
• You do not want to buy, hold or manage another property, and you value a fixed, hands-off, government-backed instrument.
• You need the shelter fast: buying bonds takes days, buying a house rarely does, and the six-month clock is unforgiving.

How to claim it, and what to keep

Buy the bonds inside the six-month window, then claim the exemption when you file. There is nothing to pre-approve: you invest first, and the exemption is claimed in the return for the year of the sale, in the capital-gains schedule where you report the property sale and set the reinvestment against it.

The six months run from the date of transfer, usually the date of the sale deed. Unlike the house route, there is no facility to park the money in a special bank account while you decide; if the bonds are not bought within six months, the exemption is lost for that gain. If your return falls due before the six months are up, buy the bonds before you file so you can claim the exemption in that return.

Keep these, because the claim can be queried years later:

• The bond allotment advice and certificate, showing the date of allotment and the amount, to prove the six-month timing and the ₹50 lakh limits.
• The sale deed for the property, which fixes the date of transfer that starts the clock.
• Your computation of the capital gain, with the cost, indexation and improvement figures behind it.
• A note of the maturity date, so you do not accidentally break the five-year lock-in or forget the bonds after they mature.

The interest is reported separately each year under income from other sources; only the capital gain sits in the capital-gains schedule.

Should you lock ₹50 lakh in Section 85 bonds?

Do the one comparison that matters: the tax you save now against the yield you give up for five years. On a ₹50 lakh long-term gain, the exemption saves ₹6,25,000 of tax at 12.5%, plus ₹25,000 of cess, so ₹6,50,000 stays with you instead of going to the government. That is a certain, immediate return of 13% on the ₹50 lakh you lock away, earned on day one.

Set against that, the bonds pay about 5.25% a year, taxable, so a 30%-slab investor keeps roughly 3.6% after tax. If you had instead paid the ₹6.5 lakh tax and invested the remaining ₹43.5 lakh freely, you would need to beat 5.25% pre-tax every year, and by a wide margin, just to catch up with having saved ₹6.5 lakh up front while still holding ₹50 lakh. For most sellers the exemption wins comfortably, because the tax saved is large and guaranteed while the yield given up is small.

The case flips when the gain is far above ₹50 lakh (the cap leaves most of it taxable anyway, so the bonds shelter only a slice), when you have a real use for the capital that beats a locked 5.25%, or when the house route suits you better. And never let the tax tail wag the dog: a five-year lock-in at 5.25% is a genuine cost, so buy the bonds to kill a tax you would otherwise pay, not to chase the interest.

Figures use the 12.5% long-term rate on property and a current bond coupon of about 5.25%; both can change, and the coupon is a market rate, not a statutory one.†

Worked examples

Section 85 FAQs

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