Section 86, Income-tax Act 2025: Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house

What was Section 54F, and where did it go in the 2025 Act?

Section 54F of the Income-tax Act 1961 let you sell almost any long-term asset, a plot of land, gold, jewellery, shares or bonds, and pay no tax on the gain if you ploughed the proceeds into a house. The Income-tax Act 2025 keeps the rule intact and re-addresses it as Section 86, titled "Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house". Every number, window and condition carries over; only the address changed.

It has a close cousin that is easy to confuse it with. Section 54, the exemption for selling one house and buying another, is now Section 82. The difference is worth fixing early: Section 82 (old 54) is for selling a residential house and asks you to reinvest only the gain, while Section 86 (old 54F) is for selling anything except a house and asks you to reinvest the whole sale price. The comparison near the end lays the two side by side.

The section numbers 86 and 82, and the Section 86 title, are cross-checked against multiple published copies of the enacted Act.†

Who can claim the Section 86 exemption?

Only individuals and Hindu Undivided Families, and only on a long-term gain. Companies, firms and LLPs are out. The asset you sell must have been held long enough to be long-term (more than 24 months for land, buildings and unlisted shares; more than 12 months for listed securities), and it must be anything other than a residential house.

In plain terms, Section 86 fits when you have all three of:

• A long-term gain from selling a capital asset that is not a residential house: a plot of land, a commercial property, gold or jewellery, listed or unlisted shares, or bonds.
• The intention to buy or build one residential house in India with the proceeds.
• At most one other residential house to your name on the date of the sale. Owning two or more, besides the new one, blocks the claim.

A non-resident selling an Indian asset can claim the same exemption; the conditions are about the houses you own, not about where you live.

Why you must reinvest the whole sale price, not just the gain

This is the single rule that costs people the most, and it is the heart of Section 86. Unlike Section 82 (selling a house), where reinvesting just the gain earns a full exemption, Section 86 measures your reinvestment against the whole net sale consideration. Put the entire net sale price into the new house and the whole gain is exempt. Put in less, and only the same fraction of the gain is spared.

Net sale consideration means what you received for the asset, minus the direct costs of selling it (brokerage, legal fees, stamp duty on the sale). The formula is short: exempt gain = capital gain × (cost of the new house ÷ net sale consideration).

Say you sell land for a net ₹1,00,00,000 and the gain inside that is ₹60,00,000. Buy a house for ₹60,00,000 and you might assume the whole gain is covered, because ₹60,00,000 was your profit. It is not. You reinvested 60% of the ₹1 crore sale price, so only 60% of the gain, ₹36,00,000, is exempt; the other ₹24,00,000 is taxed. To exempt the full ₹60,00,000 gain you would have to put the entire ₹1,00,00,000 into the house.

The gain here would otherwise be a long-term capital gain taxed at 12.5%. Section 86 removes the exempt slice before that rate applies.

The deadlines, limits and cap for Section 86

Five rules run the section. Miss a time window and the exemption is gone; break the holding rule and it is clawed back.

The ₹10 crore ceiling was added by the Finance Act 2023; the older law set no upper limit.†

Which conditions disqualify a Section 86 claim?

Three ownership tests can undo the exemption even after you have bought the house. Section 86 grants the relief on the assumption that this is your move into a home, so buying or building extra houses breaks that assumption.

The exemption is denied, or taken back, if you:

• Own more than one residential house (apart from the new one) on the date you sell the original asset. One other house is fine; two or more block the claim.
• Buy another residential house, other than the new one: within 1 year of the sale it blocks the claim outright, and within 2 years it claws back an exemption you had already taken.
• Construct another residential house, other than the new one, within 3 years of the sale.
• Sell or transfer the new house within 3 years of buying or completing it. The gain you had exempted is then charged as a long-term capital gain in the year of that sale.

Buying the new house in your own name is safest. Where the money goes into a house held in a spouse's or child's name, the department has contested the claim and the outcome has turned on the facts.†

The ₹10 crore ceiling on the new house's cost

For transfers made on or after 1 April 2023, the cost of the new house that counts towards the exemption is capped at ₹10 crore. Spend more and the excess simply drops out of the formula, so it adds neither to your exemption nor to the amount you may park in the deposit scheme.

For almost everyone this ceiling never bites. It was aimed at a small number of very large reinvestments, where a single luxury house was used to shelter an enormous gain. If your gain and reinvestment sit in the ordinary lakhs-to-a-few-crores range, treat the cap as background and move on.

The ₹10 crore figure caps both the exemption computation and the Capital Gains Account Scheme deposit.†

Parking unused money in the Capital Gains Account Scheme

The house rarely closes before your tax return is due, and the law bridges that gap. Any part of the net sale consideration you have not yet spent on the house by the return due date must be deposited in a Capital Gains Account Scheme (CGAS) account with a notified bank. Money in that account is treated as reinvested, so it keeps the exemption alive while you finish the purchase or construction.

You then draw from the account to pay for the house: within 2 years for a purchase, within 3 years for construction, both counted from the sale. Whatever is left unused when the window closes is taxed as a long-term capital gain in that later year. The deposit deadline is the return due date under Section 263 (31 July for most individuals), so open the account before you file, not after.

Deposit before the due date for filing your return. The receipt is your proof that the unspent money was set aside in time.

How do you calculate the Section 86 exemption?

Five steps turn the rule into a number:

• Work out the net sale consideration: the sale price of the original asset, less the direct selling costs (brokerage, legal charges, stamp duty on the sale).
• Work out the long-term capital gain on that asset in the normal way: sale value, less cost of acquisition and improvement.
• Add up the cost of the new house you have bought, built, or deposited in the CGAS account, and cap that figure at ₹10 crore.
• If the counted cost is equal to or more than the net sale consideration, the whole gain is exempt. If it is less, exempt gain = gain × (counted cost ÷ net sale consideration).
• Tax whatever gain remains at the long-term rate of 12.5%, add the 4% cess, and report it in your return.

The worked examples below run all five steps for a full exemption, a proportionate one, and a case where the ₹10 crore cap bites.

Section 86 or Section 82: which exemption fits your sale?

Which section you use is decided by what you sold, not by what you buy. Both routes end in a residential house, but they start in different places and ask for different amounts of reinvestment.

Selling a house goes to Section 82; selling land, gold, jewellery, shares or bonds goes to Section 86.

Should you use Section 86, and how do you keep the full exemption?

Use it whenever a large long-term gain is heading into a home you were going to buy anyway. Sheltering a ₹50,00,000 gain at 12.5% saves ₹6,25,000 plus cess, and the section asks nothing you were not already doing. The planning is all about not losing part of the exemption to the whole-consideration rule.

Three moves protect the exemption:

• Reinvest the entire net sale price, not just the profit. On a ₹1 crore sale with a ₹60,00,000 gain, putting in the full ₹1 crore exempts all ₹60,00,000; putting in only the ₹60,00,000 gain exempts just ₹36,00,000 and leaves ₹24,00,000 taxed. If the sale proceeds alone do not cover the whole price, a top-up from savings or a home loan still counts as cost of the new house.
• Split a sale across two tax years if you own too many houses. The one-house test is applied on the date of transfer, so timing the sale for a year when you hold at most one other house preserves the claim.
• Use the bonds route, but only if the asset you sold was land or a building. For those sales, investing up to ₹50,00,000 of the gain in notified capital-gains bonds (the old Section 54EC route) buys a separate exemption with a 5-year lock, and can be stacked with a partial Section 86 claim. Since 2018 the bonds route is closed to gains on shares, gold or other movable assets, so most Section 86 sellers cannot use it.†

Plan around two traps: the ₹10 crore cap on very large gains, and the 3-year lock on the new house. A quick resale of the house, even at a profit, drags the old exempted gain back into tax, so if you may sell within three years, Section 86 is not the shelter to use.

Worked examples

Section 86 FAQs

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