Save Long-Term Capital Gains Tax Under Section 85
Sold land or a building in India? Explore capital gains tax relief through eligible bonds under Section 54EC (Now Section 85), subject to investment limits and applicable conditions. Get assistance with exemption eligibility and ITR filing.
Section 85 Exemption: Save Long-Term Capital Gains Tax on Property Sale in India
Sold land or a building and want to reduce long-term capital gains tax? Section 54EC (Now Section 85) allows eligible taxpayers to claim exemption by investing qualifying capital gains in specified bonds within six months of the transfer, subject to the ₹50 lakh investment limit and other conditions.
CA Sagar Batra
Capital Gains Tax and Income Tax Filing
Maximum eligible investment in specified capital gains bonds under Section 54EC (Now Section 85), subject to conditions.
Invest eligible long-term capital gains in specified bonds within six months from the date of property transfer.
Specified bonds generally have a five-year term. Early transfer, conversion or loans against them may reverse the exemption.
Land or building must generally be held for more than 24 months to qualify as a long-term capital asset.
What Is Section 85? Long-Term Capital Gains Tax Exemption on Property Sale
Understand how investing in specified capital gains bonds can reduce taxable gains from eligible property transfers.
When you sell a long-term capital asset consisting of land, a building, or both, the profit may be taxable as long-term capital gains (LTCG). For land and buildings, a holding period of more than 24 months generally makes the asset long-term.
Section 54EC (Now Section 85) provides an exemption for eligible capital gains where the taxpayer invests the qualifying amount in specified long-term bonds within six months from the date of transfer.
Eligible bonds can include those issued by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC) and other bonds notified by the Central Government. The applicable issue and notification conditions must be checked before making an investment.
This exemption does not simply postpone all tax until the bonds mature. Where the statutory conditions are satisfied, the relevant invested capital gain is exempt. However, early transfer, conversion or certain loans against the bonds can trigger taxation of previously exempt gains.
Invest within six months from the date of qualifying property transfer.
Qualifying exemption is limited by the capital gain, investment and statutory ₹50 lakh cap.
Early transfer or conversion into money can reverse the exemption under specified conditions.
Why Does Section 85 Provide Capital Gains Tax Relief?
The provision encourages investment in specified long-term bonds while giving taxpayers a way to reduce taxable capital gains from qualifying land or building transfers.
Example: If your qualifying long-term capital gain is ₹35 lakh and you invest ₹35 lakh in eligible bonds within six months, the ₹35 lakh gain may qualify for exemption, subject to all applicable conditions. If you invest only ₹20 lakh, the exemption is generally limited to ₹20 lakh.
The exemption concerns the seller's capital gains tax. TDS on property transactions is a separate obligation. For the deduction and reporting framework, see our guide to TDS on sale of property under Section 393.
Who Can Claim Section 85 Long-Term Capital Gains Tax Exemption?
Section 54EC (Now Section 85) is available to any eligible assessee with qualifying long-term capital gains from land or building transfers. Eligibility is not restricted to individual taxpayers.
The following taxpayer categories may claim the exemption, provided they meet the relevant capital-gains and investment requirements.
Individual Taxpayers
Salaried individuals, self-employed persons, business owners and professionals with qualifying long-term capital gains.
Hindu Undivided Families
HUFs transferring qualifying long-term land or buildings and investing eligible gains in specified bonds.
Private and Public Companies
Companies with qualifying long-term gains from eligible property transfers, subject to the statutory conditions.
Partnership Firms and LLPs
Partnership firms and limited liability partnerships may qualify where the transferred property and bond investment meet Section 85 rules.
Other Eligible Assessees
Other taxable persons or entities may qualify when they satisfy the applicable long-term capital-gains and investment conditions.
Non-Resident Indians (NRIs)
NRIs may also claim Section 85 relief on qualifying Indian property gains. However, the buyer's TDS obligations and the seller's final tax calculation are separate matters. Read our guide on tax on property sale by NRIs.
Important: What Actually Makes You Eligible?
The exemption depends on the type of capital gain, not merely your taxpayer category. You must have long-term capital gains arising from the transfer of land, a building, or both.
The eligible gains must be invested in specified bonds within six months after the date of transfer.
The exemption is limited to the lowest of the qualifying capital gain, amount invested in the specified bonds and the statutory ₹50 lakh ceiling. The ₹50 lakh limit also applies to qualifying investments across the year of transfer and the following tax year, as prescribed.
What Qualifies as the "Original Asset" Under Section 85?
Section 54EC (Now Section 85) applies to qualifying long-term capital gains from land, a building, or both. The original asset must meet the property's capital-asset and holding-period requirements.
Under the Income-tax Act, 2025, the term "original asset" refers to the land, building or both whose transfer generates the eligible long-term capital gain. Two primary conditions must be satisfied.
Type of Capital Asset
The original asset must be land, a building, or both. This can include qualifying residential, commercial or urban land/building assets. Rural agricultural land in India is generally excluded from the definition of a capital asset.
Property Holding Period
Land or a building must generally be held for more than 24 months immediately before its transfer to be classified as a long-term capital asset. A holding period of 24 months or less generally produces a short-term classification, subject to applicable special rules.
Which Assets Qualify for Section 85 Exemption?
| Asset Type | Long-Term Classification | Section 85 Eligibility |
|---|---|---|
| Residential house, flat or apartment | Generally held for more than 24 months. | Eligible — subject to statutory conditions. |
| Commercial building, office or shop | Generally held for more than 24 months. | Eligible — if the transfer generates qualifying long-term capital gains. |
| Residential or commercial land / plot | Generally held for more than 24 months. | Eligible — subject to capital-asset and investment rules. |
| Urban agricultural land | Generally held for more than 24 months. | Check Conditions — may qualify if it is a taxable capital asset and generates eligible LTCG. |
| Rural agricultural land in India | Generally excluded from capital-asset classification. | Not Applicable — generally no taxable capital gain to exempt. |
| Land or building held for 24 months or less | Short-term capital asset. | Not Eligible — Section 85 requires LTCG. |
| Listed equity shares | Can be long-term under their own holding-period rules. | Not Eligible — not land or building. |
| Mutual funds, gold, jewellery and ordinary bonds | Classification varies by asset and applicable special rules. | Not Eligible — their gains do not arise from land or building. |
Practical Examples: When Does Section 85 Apply?
Example 1: Long-Term Property Sale
Anjali purchased a residential plot in 2015 and sells it in October 2026. Because the land was held for more than 24 months, it generally qualifies as a long-term capital asset. If the transfer generates eligible LTCG, Anjali may claim Section 54EC (Now Section 85) exemption by investing in specified bonds within six months, subject to the applicable limit.
Example 2: Short-Term Property Sale
Raj purchased an apartment in January 2025 and sells it in October 2026. The property was held for less than 24 months. Assuming no special holding-period adjustment, the resulting capital gain is short-term, so Section 85 exemption is unavailable for that transfer.
Example 3: Sale of Equity Shares
Meera sells listed equity shares after holding them for more than 12 months. Even if the gain qualifies as LTCG, Section 85 does not apply because the original asset is not land or a building.
Important: Holding an eligible property for more than 24 months is only the first step. To claim Section 85, the seller must also have qualifying long-term capital gains and invest the eligible amount in specified bonds within six months after transfer, subject to the ₹50 lakh investment ceiling and other conditions. The exemption is not automatic simply because the asset is a long-term property.
What Are Section 85 Capital Gains Bonds? Eligible Issuers & Investment Rules
To claim Section 54EC (Now Section 85) exemption, eligible long-term capital gains from a qualifying land or building transfer must be invested in prescribed long-term specified bonds.
These investments are commonly called 54EC bonds, Section 85 bonds or capital gains exemption bonds. Not every bond issued by a government-owned company qualifies. The particular bond issue must satisfy the statutory definition or be covered by an applicable government notification.
Qualifying Bond Issue
Under the current definition, the specified bonds must meet the applicable issue-date, issuer and notification conditions. The statutory framework refers to bonds issued on or after 1 April 2018.
Bond Holding Restriction
Qualifying bonds are redeemable after five years. Early transfer or conversion into money can reverse an exemption already claimed.
Investment Deadline
Invest qualifying capital gains within six months after the transfer of the original land or building. A late investment may not qualify.
Section 85 Bond Eligibility Requirements
| Condition | Requirement | What Investors Should Check |
|---|---|---|
| Original Capital Gain | Long-term capital gain from transfer of land or building or both. | Verify asset type, holding period, taxability and capital-gains computation. |
| Investment Deadline | Within six months after the qualifying transfer. | Confirm the transfer date and completion of the bond investment within the permitted period. |
| Investment Limit | Generally up to ₹50 lakh, subject to the statutory conditions. | Check the total qualifying investments made during the relevant tax years, including across multiple property sales. |
| Bond Period | Redeemable after five years. | Verify the bond issue's tenor, allotment date and restrictions on early transfer or conversion. |
| Eligible Issuer | NHAI, REC or other eligible government-notified bond issues. | Check the particular issue's exemption eligibility under Section 85, not merely the issuer's ownership or credit rating. |
| Loan Against Bonds | Loan or advance secured against the specified bonds may be treated as conversion into money. | Avoid transactions that trigger Section 85 exemption reversal during the restricted period. |
Which Organisations Issue Eligible Bonds?
NHAI — National Highways Authority of India
NHAI is expressly named in Section 85 as a qualifying bond issuer. However, statutory eligibility does not mean that NHAI bonds are currently open for subscription. Verify whether an eligible issue is actually available before planning an investment.
REC Limited
REC is expressly named in the statutory bond eligibility framework. Its qualifying capital gains bond issues can be considered for Section 85 relief, subject to the issue terms and subscription availability.
PFC and IRFC
Power Finance Corporation (PFC) and Indian Railway Finance Corporation (IRFC) have capital gains bond offerings under the relevant notified framework. Check the specific series, notification, subscription dates and eligibility before applying.
HUDCO — Housing and Urban Development Corporation
HUDCO's qualifying five-year bonds were notified for Section 54EC through Notification No. 31/2025, dated 7 April 2025. Check the current Section 85-compliant issue and its subscription status.
Important: Bond Availability and Subscription Deadlines
Eligible bonds may not always be open for subscription. Issuers can change the available series, issue terms, subscription channels and allotment arrangements. Check the current issue document and official issuer information well before your six-month investment deadline.
Missing the statutory investment window may result in losing the Section 85 exemption for the amount not invested within time, subject to any legally applicable relief or exception.
Investment risk: Government ownership, an advertised credit rating or the tax-exemption status should not be treated as an unconditional government guarantee of principal or returns. Read the bond's risk disclosures and issue terms.
Income-tax Act, 2025 clarification: Section 54EC (Now Section 85) exempts eligible long-term capital gains invested in qualifying specified bonds, within the ₹50 lakh statutory limit. If bonds are transferred or converted into money within five years, previously exempted gains may become taxable. Taking a loan or advance secured against these bonds can also count as a deemed conversion under Section 85(4).
The Critical 6-Month Investment Rule for Section 85 Exemption
To claim Section 54EC (Now Section 85) exemption, qualifying long-term capital gains must be invested in eligible capital gains bonds within six months after the transfer of the original asset.
If you sell qualifying land or a building and intend to claim capital gains relief under Section 85 of the Income-tax Act, 2025, meeting the six-month investment window is essential. The investment must be made in specified long-term bonds, subject to the ₹50 lakh ceiling and other statutory conditions.
What Is the "Date of Transfer"?
The six-month window begins from the legally relevant date of transfer of the original land or building.
In a straightforward registered property sale, the registered sale-deed date is commonly the relevant date. However, it is not automatically the correct date in every case.
Agreements involving possession, development arrangements, compulsory acquisition or other recognised transfers may require separate legal examination. The date of receiving the final sale proceeds should not automatically be treated as the investment deadline's starting point.
Confirm the Transfer Date
Review the sale deed, transfer documents, possession arrangements and relevant transaction facts to establish the correct date.
Check the Six-Month Deadline
Calculate the statutory six-month window from the applicable date of transfer. Confirm the precise last eligible date before investing.
Complete the Bond Investment
Subscribe to qualifying specified bonds within the permitted period. Keep proof of investment, payment confirmation and bond allotment records.
Practical Examples of the Six-Month Rule
Property Sold in August 2026
Anil sells an apartment through a registered sale deed dated 5 August 2026. Assume this is also the legally relevant date of transfer.
The six-month period runs into February 2027. Anil should verify the precise statutory deadline and complete the eligible bond investment before it, rather than waiting until the final days.
Property Sold in November 2026
Rina transfers qualifying land on 10 November 2026 under a registered sale deed. Assume the legal transfer also occurs on that date.
Her six-month investment window extends into May 2027. Receiving later instalments does not, by itself, create a new six-month window. The correct transfer date and deadline should be confirmed in advance.
Does the ITR Filing Due Date Extend the Six-Month Window?
Not automatically. Section 85 specifies its own investment time limit. A later ITR filing deadline, delayed payment from the buyer or an unavailable bond issue should not be assumed to extend that period. If unusual facts or a legally recognised exception apply, examine the transaction before relying on a different deadline.
The ₹50 Lakh Investment Cap Under Section 85: All Scenarios Explained
Section 54EC (Now Section 85) limits eligible investments in specified capital gains bonds to ₹50 lakh, subject to the statutory tax-year and reinvestment conditions.
Section 85 provides capital gains tax exemption when qualifying gains from long-term land or building transfers are invested in specified bonds within six months. However, the ₹50 lakh investment cap applies to qualifying investments across one or more original assets. You cannot automatically claim a fresh ₹50 lakh exemption for every property sold.
Maximum Eligible Bond Investment
The maximum qualifying investment is generally ₹50 lakh during a tax year and in aggregate for eligible gains from one or more property transfers across the year of transfer and the immediately following tax year, as prescribed.
Multiple Properties
Selling two or more qualifying properties does not automatically multiply your Section 85 investment limit. The ₹50 lakh restriction applies across relevant eligible gains.
Two Tax Years
If the six-month investment window crosses 31 March, you cannot claim ₹50 lakh in each year against the same qualifying property gains.
Exemption vs Tax Saving
The exemption generally cannot exceed the eligible capital gain, qualifying bond investment or statutory ₹50 lakh cap. It is not a guaranteed ₹50 lakh reduction in the tax payable.
Practical Examples of the ₹50 Lakh Investment Limit
Scenario A: Two Properties Sold
Ramesh sells two qualifying plots in June 2026 and earns a combined long-term capital gain of ₹90 lakh. He invests ₹50 lakh in eligible capital gains bonds within the statutory six-month period.
Takeaway: The cap is not ₹50 lakh per plot. The remaining ₹40 lakh is not exempt under Section 85 and must be assessed under the other applicable tax provisions.
Scenario B: Investment Across Two Tax Years
Geeta sells qualifying land in January 2027. Assuming the bond investment falls within the statutory six-month window, she splits her investment between two tax years.
Takeaway: Geeta cannot claim an additional ₹50 lakh exemption in May 2027 merely because a new tax year has started. Both investments count toward the statutory aggregate limit.
Important: Can You Invest ₹1 Crore by Splitting Across Two Tax Years?
No, not against the same qualifying gains. Section 85(2) expressly limits qualifying investment in the year of transfer and immediately following tax year to ₹50 lakh in aggregate, subject to the statutory provisions.
The provision also restricts qualifying investment to ₹50 lakh during any single tax year. Bond subscription availability, transfer-date calculations and the five-year holding restrictions must be checked separately.
Section 85 Tax Calculation Examples: How Much LTCG Tax Can You Save?
Understand how Section 54EC (Now Section 85) can reduce taxable long-term capital gains when you invest in qualifying specified bonds.
Assumptions Used in These Examples
The following illustrations assume a qualifying long-term property transfer in Tax Year 2026–27, an applicable 12.5% LTCG tax rate without indexation, and valid Section 85 bond investments within six months. Calculations show base capital-gains tax only, before any applicable surcharge, cess, other adjustments or special provisions.
Capital Gain Exceeds ₹50 Lakh
Mr. Shenoy sells a commercial property in 2026 with ₹70 lakh eligible LTCG.
| Particulars | Amount |
|---|---|
| Sale consideration | ₹1,20,00,000 |
| Assumed acquisition cost and eligible transfer expenses (without indexation) | ₹50,00,000 |
| Long-term capital gain | ₹70,00,000 |
| Qualifying investment in specified bonds | ₹50,00,000 |
| Section 85 exemption | ₹50,00,000 |
| Taxable LTCG after exemption | ₹20,00,000 |
| Base tax without exemption (12.5%) | ₹8,75,000 |
| Base tax after exemption (12.5%) | ₹2,50,000 |
| Illustrative base tax reduction | ₹6,25,000 |
Result: ₹50 lakh of the ₹70 lakh gain qualifies for exemption. The remaining ₹20 lakh LTCG produces an illustrative base tax of ₹2,50,000.
Capital Gain Is ₹50 Lakh or Less
Mrs. Rani sells a residential plot in 2026 with ₹35 lakh eligible LTCG.
| Particulars | Amount |
|---|---|
| Sale consideration | ₹75,00,000 |
| Assumed acquisition cost and eligible transfer expenses (without indexation) | ₹40,00,000 |
| Long-term capital gain | ₹35,00,000 |
| Eligible bond investment | ₹35,00,000 |
| Section 85 exemption | ₹35,00,000 |
| Taxable LTCG after exemption | ₹0 |
| Base tax without exemption (12.5%) | ₹4,37,500 |
| Base tax after exemption | ₹0 |
| Illustrative base tax reduction | ₹4,37,500 |
Result: If the entire ₹35 lakh LTCG is invested in eligible bonds within time, the gain can be fully exempt under Section 85. This does not automatically mean all of Rani's other income is tax-free.
Investment Split Across Two Tax Years
Kavita sells land in November 2026 and invests in two instalments.
| Particulars | Amount / Date |
|---|---|
| Assumed property transfer date | 10 November 2026 |
| Eligible LTCG | ₹50,00,000 |
| Bond investment in Tax Year 2026–27 | ₹30,00,000 |
| Bond investment in Tax Year 2027–28 | ₹20,00,000 |
| Total eligible investment | ₹50,00,000 |
| Section 85 exemption | ₹50,00,000 |
| Remaining taxable LTCG after exemption | ₹0 |
| Base tax without exemption (12.5%) | ₹6,25,000 |
| Illustrative base tax reduction | ₹6,25,000 |
Result: The ₹30 lakh and ₹20 lakh investments can together qualify for exemption, provided each is completed within the statutory six-month period and meets all other conditions. Splitting across tax years does not increase the aggregate ₹50 lakh cap.
Important: Actual Capital Gains Tax May Differ from These Examples
For qualifying property transfers on or after 23 July 2024, the general LTCG tax framework is 12.5% without indexation. Specified resident individuals and HUFs selling eligible land or buildings acquired before 23 July 2024 may receive protection based on the older 20%-with-indexation tax calculation where applicable.
These examples exclude health and education cess, surcharge, other income, special rate provisions and individual tax adjustments. Accordingly, the stated tax reductions are illustrative base-tax comparisons, not guaranteed refunds or final tax savings.
Section 85 eligibility: An exemption is available only if the relevant land/building transfer, investment deadline, specified bond, ₹50 lakh ceiling and holding restrictions are satisfied. A seller's TDS deduction or refund position must be assessed separately.
Section 85 vs Section 82 vs Section 86: Which Capital Gains Exemption Is Right for You?
Compare capital gains bonds with residential house reinvestment exemptions under the Income-tax Act, 2025.
| Feature | Section 54EC (Now Section 85) | Section 54 (Now Section 82) | Section 54F (Now Section 86) |
|---|---|---|---|
| Who Can Claim? | Any eligible assessee, subject to conditions. | Individuals and HUFs. | Individuals and HUFs, subject to additional house ownership rules. |
| Original Asset | Long-term land, building or both. | Qualifying long-term residential house. | Qualifying long-term capital asset other than a residential house. |
| Required Investment | Eligible specified capital gains bonds. | Purchase or construction of an eligible residential house in India. | Purchase or construction of an eligible residential house in India. |
| Investment Amount | Eligible capital gain, up to ₹50 lakh. | Qualifying capital gain reinvested in the new house. | Eligible net consideration is relevant for full relief; partial investment may give proportionate relief. |
| Exemption Ceiling | ₹50 lakh investment ceiling, subject to aggregate restrictions. | ₹10 crore qualifying new-house cost ceiling, subject to conditions. | ₹10 crore qualifying new-house cost ceiling, subject to conditions. |
| Investment Timeline | Within six months after transfer. | Purchase within one year before or two years after transfer; construction within three years after. | Purchase within one year before or two years after transfer; construction within three years after. |
| Holding Restrictions | Five-year restriction on bond transfer or conversion. | Transfer of the new house within three years affects capital gains computation. | Three-year restriction on the new house, with additional ownership conditions. |
| Can They Be Combined? | Potentially, subject to separate qualifying investments and no double exemption. | May be combined with Section 85 for qualifying residential property gains. | Combination with Section 85 requires examination of the eligible original asset and reinvestment. |
| Income from New Asset | Interest generally taxable according to applicable rules. | House-property income taxed under the applicable provisions. | House-property income taxed under the applicable provisions. |
Can Section 85 and Section 82 Be Claimed Together?
Yes, in an eligible case. Suppose an individual sells a qualifying long-term residential house and earns ₹80 lakh in capital gains. The taxpayer may consider investing ₹50 lakh in eligible capital gains bonds under Section 54EC (Now Section 85) and reinvesting the remaining eligible gain in a qualifying residential house under Section 54 (Now Section 82).
This requires separate satisfaction of both provisions. The same amount of capital gain cannot be exempted twice, and Section 82 has its own investment and timing conditions.
What Happens If You Sell, Transfer or Take a Loan Against Section 85 Bonds?
The five-year restriction is important because certain transactions can make previously exempt capital gains taxable.
Under Section 85(3)–(4), transferring specified bonds or converting them into money within five years of acquisition can trigger taxation of the capital gains previously exempted under Section 85. Taking a loan or advance secured against these bonds is treated as a deemed conversion into money.
| Action | Tax Consequence | When It Arises |
|---|---|---|
| Sell or transfer specified bonds before five years | Previously exempt capital gains attributable to the affected bonds may become taxable as LTCG. | Tax year of the transfer. |
| Convert bonds into money before five years | Previously exempt gains attributable to the converted investment become chargeable under the provision. | Tax year of conversion. |
| Take a loan or advance secured against bonds | Treated as conversion of the secured bonds into money for Section 85 purposes. | Tax year when the loan or advance is taken. |
| Hold qualifying bonds through the required five-year period | Section 85(3) recapture is generally not triggered merely by redemption after the restricted period. | Bond maturity and interest taxation must be assessed separately. |
Important: The Loan Against Bonds Trap
Example: Suresh invests ₹35 lakh in qualifying REC capital gains bonds in 2026 and claims exemption on ₹35 lakh of eligible capital gains.
In 2028, he obtains a bank loan using those bonds as security. Under Section 85(4), the loan can be treated as conversion of the bonds into money. The previously exempt capital gains attributable to the affected investment become chargeable in the tax year when the loan is taken.
Remember: A loan secured by the bonds is not the same as simply holding them until maturity. Avoid pledging the bonds without understanding the tax implications.
How to Claim Section 85 Capital Gains Exemption: Step-by-Step Process
Follow these eight steps to calculate eligible gains, invest within time and claim the exemption correctly in your income-tax return.
Calculate the Long-Term Capital Gain
Determine the eligible sale consideration, acquisition cost, improvement cost and allowable transfer expenses. Apply the capital-gains computation provisions applicable to the transfer year. For 2026 transfers, do not automatically apply Cost Inflation Index (CII).
Confirm the Legally Relevant Transfer Date
Review the registered sale deed and transaction documents. The date of transfer determines the six-month investment window. Registration may be the relevant date in a straightforward sale, but not necessarily in every transaction.
Find Currently Available Eligible Capital Gains Bonds
Check the specific bond issue offered by REC, NHAI or another notified eligible issuer. Confirm that the issue qualifies for Section 85 and is available for subscription.
Invest Within Six Months
Complete the qualifying bond investment within six months after the transfer. Retain bank statements, transaction references, application details and allotment records. Use documented, traceable payment channels.
Check the ₹50 Lakh Investment Ceiling
Verify qualifying investments against the ₹50 lakh cap. Consider investments from multiple property transfers and those spanning the year of transfer and immediately following tax year.
Preserve Supporting Documents
Keep the sale deed, property cost records, capital-gains computation, investment proof, allotment confirmation and bond certificate or holding statement. These help support your exemption claim.
Report the Gain and Exemption in Your ITR
Use the income-tax return form applicable to your taxpayer category, income sources and relevant tax year. Report the capital gain and claim the eligible Section 85 exemption in the prescribed capital-gains schedules. The correct ITR form is not always ITR-2.
Maintain the Five-Year Bond Holding Requirement
Avoid selling, transferring or converting the qualifying bonds into money before the restricted period ends. Do not obtain a loan or advance secured against them without reviewing Section 85(4).
Important: Capital gains exemptions should be planned using the taxpayer's complete transaction details. Property type, acquisition date, residential status, capital-gains computation, bond eligibility and investment dates can materially affect the exemption available. Tax deducted at source on the property sale must also be reconciled separately when filing the return.
Common Mistakes That Can Cost You the Section 85 LTCG Tax Exemption
Even an eligible property sale may not qualify for exemption if the bond investment, timing or tax reporting is incorrect.
| # | Common Mistake | Possible Consequence | How to Avoid It |
|---|---|---|---|
| 01 | Investing after the six-month window | Late investment may not qualify, leaving the relevant LTCG taxable. | Determine the legally relevant property transfer date and complete the investment on time. |
| 02 | Expecting ₹50 lakh exemption per property | Investments exceeding the applicable aggregate cap cannot generate extra relief. | Apply the ₹50 lakh restrictions across eligible transfers and relevant tax years. |
| 03 | Purchasing bonds in another person's name without confirming eligibility | Ownership or funding mismatches may put the exemption at risk. | Prefer investment in the claiming assessee's name and verify any joint-holding arrangement before subscribing. |
| 04 | Selling, converting or borrowing against bonds within five years | Previously exempted LTCG attributable to the affected bonds may become taxable. | Avoid early conversion and loans or advances secured against the bonds. |
| 05 | Failing to report the capital gain and exemption | Inaccurate filing may lead to adjustments, enquiries or disputes. | Use the appropriate ITR and disclose the gain and eligible exemption in the required schedules. |
| 06 | Assuming the registration date is always the date of transfer | Incorrect deadline calculation may make an investment late. | Review the sale deed, agreements, possession and relevant transaction facts before calculating six months. |
| 07 | Investing in bonds that are not eligible under Section 85 | The investment may not qualify for the capital-gains exemption. | Verify the particular NHAI, REC or other notified bond issue, not just its issuer. |
Section 85 LTCG Exemption: Quick Reference Summary
A concise overview of the key requirements under Section 54EC (Now Section 85).
| Feature | Rule Under Section 85 |
|---|---|
| Who Can Claim? | Any eligible assessee, including individuals, HUFs, companies, firms, LLPs and non-residents, subject to conditions. |
| Original Asset | Long-term capital asset consisting of land, a building or both; generally held for more than 24 months. |
| Eligible Capital Gain | Long-term capital gain from qualifying land or building. Gains from shares, mutual funds or gold do not qualify. |
| New Investment | Specified five-year capital-gains bonds issued by NHAI, REC or another eligible notified issuer. |
| Investment Deadline | Within six months after the legally relevant property transfer date. |
| Maximum Investment | ₹50 lakh, subject to the tax-year and combined two-year restrictions. |
| Exemption Amount | Lower of the qualifying capital gain, eligible investment and applicable statutory ceiling. |
| Bond Holding Restriction | Five years from acquisition for the specified early transfer or conversion rules. |
| Early Bond Transfer | Previously exempted capital gains attributable to the affected investment become taxable under the recapture provision. |
| Loan Against Bonds | A loan or advance secured against the bonds is deemed conversion into money. |
| Additional Deduction | No Section 123 deduction is allowed for the same investment already used to claim Section 85 relief. |
| Redemption After Five Years | Redemption after the restriction period does not, by itself, trigger Section 85(3) recapture; other tax consequences must be assessed separately. |
| Interest on Bonds | Generally taxable according to the applicable interest recognition and income-tax rules. |
Section 85 Capital Gains Exemption Compliance Checklist
Review these points before claiming the exemption in your income-tax return.
The original asset is qualifying land, a building or both.
The property is a long-term capital asset, generally held for more than 24 months.
The capital gain is calculated correctly using the rules applicable to the transfer year, without automatically assuming indexation.
The selected bond issue qualifies under Section 85 and is open for subscription.
The investment is completed within six months after the legally relevant property transfer date.
Total qualifying investment remains within the applicable ₹50 lakh restrictions.
The bond allotment confirmation, payment records and holding certificate are preserved.
The full capital gain and Section 85 exemption are reported in the appropriate ITR form and schedules.
Bonds will not be transferred, converted or used as security for a loan during the five-year restricted period.
Taxable bond interest is included in the relevant year's return as applicable.
Keep Your Supporting Documents Ready
Retain property purchase and sale documents, eligible acquisition and improvement cost records, capital-gains workings, bond application details, payment confirmation, allotment or holding proof, and relevant TDS information. These records support your exemption claim.
Should You Use Section 85 for Long-Term Capital Gains Exemption?
Use these four questions to understand whether capital-gains bonds may be suitable for your property sale.
Did you transfer qualifying land or a building held for more than 24 months?
Section 85 may not apply. Check whether the asset is a taxable capital asset and whether any special holding-period rule applies.
Check the eligible capital gain in Question 2.
Does the transfer generate a qualifying long-term capital gain?
Without eligible LTCG, there is no qualifying gain to exempt. Review any applicable capital-loss treatment.
Consider whether eligible bond investment fits your financial plan.
Can you invest the eligible amount in specified bonds and hold them for five years?
Explore other applicable capital-gains exemptions. Section 54 (Now Section 82) or Section 54F (Now Section 86) may be relevant, depending on the asset and taxpayer.
Confirm the investment deadline and bond availability.
Can you complete the eligible bond investment within six months after transfer?
You may not meet the Section 85 deadline. Do not assume the ITR due date or delayed sale proceeds will extend the investment window.
Section 85 may be a suitable option. Verify eligible gains, the ₹50 lakh ceiling, bond issue and all statutory conditions before investing.
Final Eligibility Reminder
Answering "Yes" to all four questions does not automatically guarantee exemption. The legally relevant property transfer date, capital-gains calculation, bond issue, investment timing and required tax disclosures must still satisfy Section 85.
Frequently Asked Questions About Section 85 Capital Gains Tax Exemption
Answers to common questions about the ₹50 lakh investment limit, eligible bonds, deadlines, NRIs, inherited property and tax reporting.
01 I sold two properties in one year. Can I invest ₹50 lakh per property?
No. Section 54EC (Now Section 85) places a combined ₹50 lakh ceiling on qualifying bond investments from one or more original assets during the relevant tax-year period.
Example: Raju sells two qualifying plots and earns ₹80 lakh LTCG. If he invests ₹50 lakh in eligible bonds within the statutory window, the maximum Section 85 exemption is generally ₹50 lakh, not ₹1 crore.
02 Can I combine Section 85 and Section 54 to save tax on ₹1 crore LTCG?
Potentially, yes. An eligible individual or HUF selling a qualifying long-term residential house may claim Section 54 (Now Section 82) along with Section 54EC (Now Section 85), provided each provision's conditions are met.
For example, ₹50 lakh of eligible gain might qualify through specified bonds, while another ₹50 lakh may qualify through investment in a new residential house. The same gain cannot be exempted twice.
03 The buyer is paying me in instalments. When does the six-month period start?
The six-month window starts from the legally relevant date of property transfer, not automatically from the date of the final instalment.
In a straightforward registered sale, the registered sale-deed date is commonly the relevant date. However, agreements involving possession, development arrangements or other special circumstances may require closer examination.
Receiving instalments after the transfer does not ordinarily restart the six-month investment window.
04 Can I purchase Section 85 bonds in my spouse's or parent's name?
The safest approach is to purchase eligible bonds in the name of the assessee claiming the capital-gains exemption.
If you want to invest in another person's name or use a joint-holding arrangement, obtain transaction-specific tax advice first. Ownership, beneficial interest and investment documentation can affect the claim.
Do not assume that any investment in a family member's name automatically qualifies for your exemption.
05 I jointly own property with my sibling. Can we each claim up to ₹50 lakh?
Yes, potentially. Genuine co-owners are separately assessed on their respective shares of capital gain.
Each co-owner may independently claim Section 85 exemption on their own eligible long-term capital gain, subject to the ₹50 lakh investment ceiling applicable to that assessee.
The division of ownership and gains must reflect the actual legal and beneficial interests. A 50:50 split should not be assumed unless supported by the facts.
06 Do NHAI/REC capital gains bonds pay interest, and is it taxable?
Eligible capital gains bonds generally provide interest according to their issue terms. The applicable rate and payment schedule depend on the particular bond issue.
Bond interest is generally taxable under the applicable income-tax provisions, commonly as Income from Other Sources.
The Section 85 exemption concerns qualifying property capital gains; it does not automatically exempt interest earned on the bonds.
07 Can Non-Resident Indians (NRIs) claim Section 85 capital gains exemption?
Yes. Non-resident status does not, by itself, disqualify an assessee from Section 85.
An NRI selling qualifying long-term land or a building in India may claim exemption by investing in eligible bonds within six months, subject to the ₹50 lakh ceiling and other conditions.
However, the buyer's TDS obligations, tax treaty position and the seller's final capital-gains liability must be examined separately.
08 What if eligible capital gains bonds are not available before my six-month deadline?
Bond issue availability can change. NHAI, REC and other eligible notified issuers may not always have subscriptions open.
Check the current bond offerings, issue documents and authorised subscription channels early in the six-month period.
Unavailability should not be assumed to automatically extend the statutory deadline. If unusual circumstances arise, obtain professional advice on whether any legally available relief applies.
09 I inherited a property and then sold it. Can I claim Section 85?
Yes, potentially. If inherited land or a building qualifies as a long-term capital asset and produces eligible LTCG, Section 85 may apply.
For inherited property, the holding period generally includes the period for which the previous owner held the asset.
The acquisition cost is generally linked to the previous owner's cost, not automatically to the property's market value on the date of inheritance.
Where eligible, the fair market value as on 1 April 2001 may be relevant for older properties. Indexation for transfers in 2026 must be considered under the specific applicable provisions.
10 After five years, is the bond principal taxable again when I redeem it?
Holding eligible bonds through the required five-year period means that normal redemption after that period does not, by itself, trigger the early-conversion recapture rule under Section 85.
However, it is better to distinguish the original property-gain exemption from the separate tax treatment of the bond investment.
Interest remains generally taxable, and any other gain or tax consequence on the particular bond should be checked under the applicable law.
Important: These FAQs provide general guidance under Section 54EC (Now Section 85). Actual eligibility depends on the transfer date, capital-gains calculation, taxpayer status, bond issue, investment timing and other statutory requirements. The ₹50 lakh figure represents the maximum qualifying investment ceiling, not guaranteed income-tax savings.
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CA Sagar Batra
ICAI Registered Chartered Accountant · 10+ Years of Professional Experience · 12,000+ Tax Filings
Chartered Accountant with experience in taxation, compliance and business advisory. His work covers Income Tax, GST, TDS, tax notices, business compliance and financial documentation for individuals and businesses across India.