Section 86
Capital Gains Exemption on Reinvestment in a Residential House
Not a House
In India
2 Years After
Sold land, gold, shares, or a commercial property and now worried about a big long term capital gains tax bill?
Section 86 of the Income Tax Act 2025 gives you a legal way to save that tax. If you reinvest the money in one residential house in India, your LTCG can be fully or partly exempt.
This guide explains Section 86 in plain language, the way a Chartered Accountant would walk you through it across the table. You will learn who can claim the exemption, what assets qualify, the exact formula, time limits, the Capital Gains Account Scheme, clawback rules, and the difference between qualification failure and later withdrawal.
We have also added worked examples, a checklist, comparison tables, a documents list, and over 25 FAQs.
Holding period classification, LTCG computation, and return disclosure depend on your exact facts. Treat this article as a strong starting point, and confirm the final numbers with a tax professional.
Quick Summary of Section 86
| Item | Details |
|---|---|
| Purpose | Exempt long term capital gains when sale proceeds are reinvested in one residential house in India |
| Applicable To | Individual taxpayer and Hindu Undivided Family (HUF) only |
| Eligible Assets | Any long-term capital asset that is not a residential house (land, gold, shares, commercial property, etc.) |
| Tax Benefit | Full or proportionate exemption of LTCG from tax |
| Time Limits | Purchase: 1 year before or 2 years after transfer. Construction: within 3 years after transfer |
| Maximum Benefit | Cost of new asset capped at Rs 10 crore; net consideration capped at Rs 10 crore for deposit purposes |
| Important Conditions | Buy/construct only one residential house; do not own/buy/build extra houses beyond limits; do not sell the new house within 3 years |
Section 86 of the Income Tax Act 2025 allows an individual or HUF to claim a capital gains exemption on the transfer of a long-term capital asset (other than a residential house) if the sale proceeds are reinvested in one residential house in India within the prescribed time. If the net consideration is fully reinvested, the entire LTCG is exempt. If only part is reinvested, the exemption is proportionate.
What Is Section 86 of Income Tax Act 2025?
Section 86 sits in Chapter IV (Computation of Total Income) of the Income-tax Act, 2025. Its full title is: "Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house."
In simple words, the section gives a tax break to people who sell a capital asset (that is not a house) and put the money into buying or building one residential house in India.
The Objective
The idea is straightforward. The government wants to encourage residential property investment. So it tells taxpayers: if you take the gains from selling your land, gold, or shares and invest in a home, you will not be taxed on those gains, fully or partly.
The Legislative Background
Under the old Income Tax Act, 1961, this benefit lived in Section 54F. The Income Tax Act 2025 carries the same logic forward through Section 86. So when people ask for the "Section 54F equivalent" in the new law, the answer is Section 86.
The structure, the proportionate formula, and the residential house condition all look familiar, with a few tightened rules we will explain later.
Section 86 is the new home for the old Section 54F style exemption on reinvestment in a residential house.
Where Section 86 Fits Among Other Capital Gains Exemptions
| Section | When It Applies | What You Reinvest In | Reinvest the Gain or the Full Proceeds? |
|---|---|---|---|
| Section 82 (was Section 54) | You sell a residential house | Another residential house in India | Only the capital gain |
| Section 85 (was Section 54EC) | You sell land or building | Specified bonds (REC, PFC, IRFC, and similar), within 6 months | The capital gain, capped at Rs 50 lakh |
| Section 86 (was Section 54F) | You sell a long-term asset that is not a house | One residential house in India | The full net consideration for full exemption |
The key contrast: Section 82 needs only the gain reinvested, while Section 86 asks you to reinvest the entire net consideration to get full exemption. Many sellers combine options, for example using Section 82 or 86 for the home and Section 85 bonds for the leftover gain. Confirm your exact mix with a tax professional, since the bond limits and timelines are strict.
Who Can Claim Exemption Under Section 86?
✅ Eligible Taxpayers
- Individual taxpayer (resident or, subject to conditions, non-resident individuals)
- Hindu Undivided Family (HUF)
❌ Who Cannot Claim
- Companies
- Partnership firms and LLPs
- Association of Persons (AOP) and Body of Individuals (BOI)
- Any taxpayer who is not an individual or HUF
Practical Example: If a private limited company sells a commercial plot, it cannot use Section 86. The capital gain exemption is reserved for individuals and HUFs reinvesting in a home.
Eligibility Conditions Under Section 86
Important: If you tick every box, you are on solid ground. Miss one, and the exemption can fail or be withdrawn.
Long-term asset, not a house, reinvested in one Indian home, within the time window, without breaking the extra-house rules.
Time Limits Under Section 86
| Activity | Time Limit |
|---|---|
| Purchase before transfer | Within 1 year before the date of transfer |
| Purchase after transfer | Within 2 years after the date of transfer |
| Construction after transfer | Within 3 years after the date of transfer |
| Deposit in Capital Gains Account Scheme | Before filing the Income Tax Return, and not later than the due date for filing the return under section 263 |
Note carefully: the purchase window can start one year before you actually sell the original asset. So a home bought up to a year earlier can still qualify, provided all other conditions are met.
How Capital Gains Exemption Is Calculated Under Section 86
This is the heart of the section. The exemption is proportionate to how much of your sale proceeds you reinvest. It is based on net consideration, not just the gain.
Net Consideration = Full value of sale consideration − expenditure incurred wholly and exclusively for the transfer (such as brokerage, legal fees, registration costs).
Cost of New Asset = Amount actually spent on buying or constructing the new house, plus any amount deposited in the Capital Gains Account Scheme (subject to the Rs 10 crore cap).
Full Exemption: Net Consideration ≤ Cost of New Asset → Entire LTCG Exempt
Partial Exemption: Net Consideration > Cost of New Asset
Caps: Cost of New Asset capped at Rs 10 crore. Net Consideration also capped at Rs 10 crore for deposit purposes.
The Two-Part Formula
Rule 1 — Net Consideration Is More Than Cost of New Asset (Partial Exemption)
Rule 2 — Net Consideration Is Equal To or Less Than Cost of New Asset (Full Exemption)
The entire LTCG becomes exempt. No capital gains tax is charged.
Remember the caps. If the cost of the new asset exceeds Rs 10 crore, only Rs 10 crore is considered. Likewise, net consideration above Rs 10 crore is restricted for the relevant computation.
Worked Examples
- Sale of long-term shares: Rs 80,00,000 net consideration
- LTCG: Rs 50,00,000
- New residential house cost: Rs 85,00,000
Since the new house cost exceeds the net consideration, the exemption is complete.
Result: Entire LTCG of Rs 50,00,000 is exempt. Taxable LTCG = Nil.
- Sale of land: Rs 1,00,00,000 net consideration
- LTCG: Rs 60,00,000
- New residential house cost: Rs 70,00,000
Taxable LTCG = Rs 18,00,000
- Sale of gold: Rs 50,00,000 net consideration
- LTCG: Rs 30,00,000
- New residential house cost: Rs 20,00,000
Taxable LTCG = Rs 18,00,000
Investing too little significantly reduces the available exemption.
- Commercial property sold for Rs 14,00,00,000 net consideration
- LTCG: Rs 9,00,00,000
- New residential house cost: Rs 12,00,00,000
The cost of the new asset is capped at Rs 10 crore. Net consideration is also restricted to Rs 10 crore for the relevant computation.
Since the capped cost equals the capped net consideration, full exemption applies within the prescribed limits.
Result: The eligible LTCG becomes exempt up to the statutory cap. High-value transactions should always be reviewed professionally.
Reinvest the full net consideration for full exemption. Reinvest only part of it, and the exemption reduces proportionately.
Capital Gains Account Scheme (CGAS) Under Section 86
Sometimes you cannot buy or build the new house before your return filing date. The law has a solution: park the money in the Capital Gains Account Scheme.
When CGAS Is Required
If the net consideration is not utilised to purchase the new asset before the due date for filing your Income Tax Return, the unutilised amount must be deposited under the notified scheme.
How It Works
Deposit Deadline
Deposit before filing the return and not later than the due date for filing the return of income under Section 263.
Keep proof of deposit and submit it with your return records.
What Happens on Non-Compliance (Clawback)
If the deposited amount is not fully used to buy or construct the house within the prescribed time, the unused portion becomes taxable.
| Term | Meaning |
|---|---|
| X | Capital gains that were not charged earlier under Section 86. |
| Y | Capital gains that would not have been exempt if the cost of the new asset were restricted to the amount actually utilised. |
The recaptured amount becomes taxable in the year when three years from the date of transfer expire.
CGAS buys you time, but not indefinitely. Use the money within the allowed window or the exemption can be clawed back.
Need Help With Section 86 Tax Savings?
Get expert guidance from CA Sagar Batra on LTCG exemption, reinvestment rules, CGAS compliance, and tax-saving opportunities under Section 86.
When Section 86 Benefit Can Be Withdrawn
Here is a point many guides blur. There is a difference between never qualifying and qualifying first, then losing it later. Let us separate the two.
❌ Qualification Failure (You Never Get the Exemption)
- You own more than one residential house (other than the new asset) on the date of transfer of the original asset.
- You purchase any residential house (other than the new asset) within one year of transfer.
- You construct any residential house (other than the new asset) within three years of transfer.
- The income from such other house is chargeable under "Income from House Property."
⚠️ Later Withdrawal (Exemption Granted, Then Taxed Back)
- You purchase another qualifying residential house (other than the new asset) within two years after the transfer.
- You construct another residential house within three years after the transfer.
- The earlier exempt LTCG becomes taxable as long-term capital gains in that later year.
- You transfer (sell) the new house within three years of its purchase or construction.
Section 86 contains two overlapping rules about buying or building another house, and they work at different stages.
Disqualification at Entry (Sub-section 5): Owning more than one residential house (other than the new asset) on the transfer date, purchasing another house within one year of transfer, or constructing another within three years can block the claim completely.
Withdrawal After Claim (Sub-section 6): Even if you qualify, purchasing another house within two years after transfer or constructing another within three years can make the earlier exempt gain taxable in that later year.
The one-year and two-year windows refer to different triggers, so they are not contradictory. Because this overlap is often scrutinised during assessments, always review your timeline with a qualified CA before claiming the exemption.
Suppose you sold land, purchased a qualifying residential house, and claimed an exemption of Rs 40,00,000.
Two years later, you sell that new house. Since the property was transferred within the three-year lock-in period, the earlier exempt LTCG of Rs 40,00,000 becomes taxable in the year of sale.
Failing the entry conditions means you never receive the exemption. Breaking the holding conditions later means the exemption can be reversed and taxed back.
Section 86 vs Section 54F: Detailed Comparison
Section 86 of the Income Tax Act 2025 is the functional Section 54F equivalent under the old Income-tax Act, 1961. The core mechanics match. The headline change in the enacted Section 86 text is the disqualification window for buying another house.
| Basis | Section 86 (Income Tax Act 2025) | Section 54F (Income-tax Act, 1961) |
|---|---|---|
| Eligible Taxpayer | Individual / HUF | Individual / HUF |
| Asset Sold | Any long-term capital asset other than a residential house | Any long-term capital asset other than a residential house |
| New Asset | One residential house in India | One residential house in India |
| Exemption Basis | Proportionate to net consideration | Proportionate to net consideration |
| Full Exemption | When net consideration ≤ cost of new asset | When net cost of house ≥ net consideration |
| Purchase Window | 1 year before / 2 years after transfer | 1 year before / 2 years after transfer |
| Construction Window | 3 years after transfer | 3 years after transfer |
| Disqualification on Buying Another House | If another house (other than new asset) is purchased within 1 year of transfer | Commonly read as within 2 years for purchase |
| CGAS Deposit | Required, by return due date with proof | Required, by return due date with proof |
| Monetary Cap | Rs 10 crore on cost and on net consideration | Rs 10 crore cap (from 1 April 2024) |
| New Asset Lock-In | Do not sell within 3 years | Do not sell within 3 years |
The key enacted difference to note: Under the Section 86 text being discussed, purchasing another residential house (other than the new asset) within one year of transfer is a disqualification point. This is a tighter window than what taxpayers were used to.
Plan any second home purchase carefully around the original asset sale date, and read this together with the technical note above.
Practical Examples by Asset Type
Section 86 covers many capital assets. Here is how it plays out across common cases. (Holding period classification decides whether your gain is long-term. Confirm this with a professional before claiming.)
You sell a long-term plot of land and reinvest the full net consideration in a new flat in India. Since land is not a residential house and you put the entire net consideration into one home, you can claim a full capital gains exemption.
You sell long-term gold jewellery and use part of the proceeds to buy a residential house. Gold qualifies as an eligible original asset. Because you reinvested only part of the net consideration, the LTCG exemption is proportionate.
A commercial shop or office is not a residential house, so it qualifies. Sell your long-term commercial property, reinvest in one residential house, and claim the exemption. Watch the Rs 10 crore caps on high-value deals.
Long-term listed or unlisted shares can be eligible original assets. Reinvesting the net consideration in a residential house can give you a capital gains exemption under Section 86. The LTCG on shares has its own computation rules, so get the numbers checked.
NRIs are individual taxpayers, so they may be eligible if every condition is satisfied: a long-term capital asset other than a house, reinvestment in one residential house in India, and adherence to the time limits and other-house rules.
NRI taxation involves extra layers like TDS and DTAA, so professional advice is strongly recommended here.
If the asset is a long-term non-residential capital asset and you reinvest in one Indian home correctly, the exemption can apply across land, gold, shares, commercial property, and eligible NRI transactions.
Documents You Should Keep for a Section 86 Claim
Good records make or break an exemption if your return is ever reviewed. Keep these safe.
If you cannot prove the date, the amount, and the reinvestment, the exemption is hard to defend. Build the file as you go, not at the last minute.
Practical Interpretation and Authority Notes
A few points help you read Section 86 the way professionals do, without overstating anything.
Who Should Definitely Take Expert Advice
Section 86 looks simple, but several situations carry real risk. Get professional help if any of these apply to you:
Need Help With Section 86 Tax Savings?
Get expert guidance from CA Sagar Batra on LTCG exemption, reinvestment rules, CGAS compliance, and tax-saving opportunities under Section 86.
CA Sagar Batra
CA Sagar Batra is a Chartered Accountant with 10+ years of experience in Indian taxation. He works closely with individuals, investors, and business owners on income tax filing, capital gains, and practical tax planning.
Sagar focuses on explaining complex tax provisions in plain, usable language, so readers can make confident decisions and stay compliant. His writing covers everyday taxpayer concerns, from choosing the right exemptions to filing accurate returns and avoiding common mistakes.
He believes good tax advice should be clear, honest, and easy to act on. Through his articles, Sagar aims to help you understand the rules that affect your money and apply them correctly.