Section 86
Sold a long-term capital asset such as land, gold, eligible shares or commercial property? Section 86 of the Income-tax Act, 2025 may help eligible individuals and HUFs save long-term capital gains tax by reinvesting qualifying net sale consideration in one residential house in India. The exemption depends on investment amount, timing, house ownership and other statutory conditions.
Selling property? Understand the capital gains tax for property before choosing an exemption.
*Note: The ₹10 crore limit applies to the cost of the new residential house considered for exemption calculation, not necessarily its purchase price. All benefits are subject to the conditions of Section 54F ( Now Section 86 ), including applicable house-ownership and reinvestment rules.
What Is Section 86 of the Income-tax Act, 2025?
Sold land, gold, shares or commercial property held as a long-term capital asset? You may be able to reduce your Long-Term Capital Gains (LTCG) tax by purchasing or constructing a residential house, provided you meet the legal conditions.
Section 54F ( Now Section 86 ) allows an eligible individual or Hindu Undivided Family (HUF) to claim a capital gains exemption when gains arise from transferring a long-term capital asset other than a residential house and the qualifying net sale consideration is invested in one residential house in India.
The exemption can be full or partial, depending on the amount invested, the net consideration, the statutory ₹10 crore limit, existing house ownership and other applicable conditions. Merely buying another property does not automatically make the capital gain tax-free.
This guide explains the eligibility conditions, capital gains exemption formula, investment deadlines, Capital Gains Account Scheme (CGAS), and circumstances in which an earlier exemption may become taxable. For the broader statutory framework, see the Income Tax Act 2025 sections .
What You'll Learn in This Guide
सीधी बात: अगर आपने जमीन, सोना या shares बेचकर long-term capital gain कमाया है, तो उस पैसे को नई residential house में invest करने पर Section 86 के तहत tax exemption मिल सकती है। लेकिन इसके लिए investment amount, time limit और house ownership की conditions पूरी करना जरूरी है।
Quick Summary of Section 86
Understand the key capital gains exemption conditions under Section 54F ( Now Section 86 ) before planning your residential house investment.
| Item | Section 86 Details |
|---|---|
| Purpose | Provides a possible Long-Term Capital Gains (LTCG) exemption when qualifying proceeds from a long-term capital asset, other than a residential house, are invested in one residential house in India. |
| Who Can Claim? | Individuals and Hindu Undivided Families (HUFs), subject to the applicable conditions. |
| Eligible Original Assets | A qualifying long-term capital asset other than a residential house. Examples include land, gold, eligible shares and commercial property, where the asset qualifies as long-term under the relevant rules. |
| Required Reinvestment | Purchase or construct one residential house in India within the prescribed period. |
| Tax Benefit | Full or proportionate LTCG exemption. Generally, full exemption may apply when eligible investment is at least equal to the net sale consideration, subject to the statutory cap and other conditions. Partial investment leads to a proportionate exemption. |
| Investment Time Limits | Purchase: Within 1 year before or 2 years after transfer. Construction: Within 3 years after transfer of the original asset. |
| ₹10 Crore Limits | New house cost: Cost above ₹10 crore is excluded from the exemption calculation. CGAS deposit: Net consideration above ₹10 crore is excluded for the specified deposit provision. |
| Capital Gains Account Scheme | Qualifying unutilised net consideration may need to be deposited in a notified Capital Gains Account Scheme (CGAS) account by the applicable ITR filing due date if it has not been invested within the relevant statutory stage. |
| Ownership & Withdrawal Conditions | Restrictions apply to ownership of other residential houses, purchasing or constructing additional houses, and transferring the new residential house within 3 years. Breaching applicable conditions may make an earlier exemption taxable. |
Important: Net consideration is generally the full sale consideration minus eligible expenses incurred wholly and exclusively for the transfer. The ₹10 crore limit on CGAS-related net consideration should not be confused with a general ₹10 crore ceiling on every sale transaction.
Quick Answer: How Does Section 86 Work?
Section 54F ( Now Section 86 ) allows eligible individuals and HUFs to claim exemption on long-term capital gains from transferring a qualifying non-residential-house capital asset when they invest in one residential house in India.
If the qualifying net sale consideration is fully invested within the prescribed conditions and permitted limit, the entire eligible LTCG may be exempt. If only part is invested, the exemption is generally calculated proportionately: LTCG × Eligible New House Cost ÷ Net Consideration .
सीधी बात: Section 86 में सिर्फ capital gain की amount invest करना जरूरी नहीं, बल्कि net sale consideration भी important है। पूरा eligible amount invest करने पर full exemption और कम investment करने पर partial exemption मिल सकती है, अगर बाकी conditions पूरी हों।
Section 86 Explained: Purpose and Legislative Background
Understand the legal meaning of Section 86 of the Income-tax Act, 2025, its role in capital gains taxation and its connection with the earlier law.
Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house.
Section 86 falls under Chapter IV — Computation of Total Income of the Income-tax Act, 2025. It provides a conditional Long-Term Capital Gains (LTCG) exemption where an eligible individual or Hindu Undivided Family (HUF) transfers a qualifying long-term capital asset other than a residential house and invests in a new residential house in India.
The provision applies to qualifying assets such as land, gold, shares or commercial property, provided the asset meets the applicable long-term holding-period and other conditions. It does not apply merely because any asset has been sold or any property has been purchased.
What Is the Purpose of Section 86?
The provision offers capital gains tax relief when qualifying sale proceeds are reinvested in residential housing. It provides a specific tax treatment for eligible reinvestment rather than charging the entire qualifying capital gain immediately.
A key distinction is that net sale consideration matters for calculating the benefit. Investing only the amount of capital gain may not qualify the taxpayer for the full exemption.
The exemption can be full or proportionate, depending on the qualifying investment, applicable ₹10 crore cost limit and the other statutory conditions.
What Was Section 86 Under the Old Income Tax Law?
Under the Income-tax Act, 1961, the corresponding provision was Section 54F ( Now Section 86 ). It provided relief for qualifying long-term capital gains when eligible taxpayers invested in a residential house.
The Income-tax Act, 2025, effective from 1 April 2026, places the corresponding provision under Section 86. Its core approach continues to involve qualifying reinvestment, net consideration, prescribed time limits and restrictions on residential house ownership.
Applicable under the earlier income-tax framework.
Corresponding provision under the new framework.
The applicable law depends on the relevant year and the facts of the capital asset transfer.
Key Takeaway
Section 54F ( Now Section 86 ) is the provision for claiming a possible exemption on long-term capital gains from an eligible asset other than a residential house through qualifying investment in one residential house in India. The benefit is subject to all statutory conditions.
सीधी बात: पुराने Income Tax Act में यह benefit Section 54F में था। नए Income-tax Act, 2025 में इसका corresponding provision Section 86 है। अगर आप eligible long-term asset बेचकर एक residential house में investment करते हैं, तो conditions पूरी होने पर capital gains tax में छूट मिल सकती है।
Section 86 vs Other Capital Gains Exemptions
The Income-tax Act, 2025 provides different capital gains exemptions depending on the asset sold, the type of reinvestment and the applicable conditions. Compare Section 54 ( Now Section 82 ), Section 54D ( Now Section 84 ), Section 54EC ( Now Section 85 ) and Section 54F ( Now Section 86 ) to understand which provision may apply to your transaction.
| Section | When It Applies | Reinvestment Requirement | Amount to Reinvest |
|---|---|---|---|
| Section 82 Section 54 ( Now Section 82 ) Residential house exemption | WHEN IT APPLIES An eligible individual or HUF sells a long-term residential house and earns capital gains. | REINVESTMENT Purchase or construct a qualifying residential house in India within the prescribed period. A limited one-time two-house option is available in qualifying cases. | INVESTMENT AMOUNT Reinvest the eligible capital gain, rather than the entire sale proceeds, for full exemption. Subject to the applicable ₹10 crore limit and other conditions. |
| Section 84 Section 54D ( Now Section 84 ) Compulsory acquisition of industrial property | WHEN IT APPLIES A qualifying land or building forming part of an industrial undertaking is compulsorily acquired. The prescribed prior-use condition must be satisfied. | REINVESTMENT Invest in eligible replacement land, building or related rights for shifting, re-establishing or setting up an industrial undertaking. Generally within 3 years. | INVESTMENT AMOUNT Reinvest the eligible capital gain in the qualifying replacement asset. Relief is limited by the gain, qualifying investment and statutory conditions. |
| Section 85 Section 54EC ( Now Section 85 ) Specified capital gains bonds | WHEN IT APPLIES An eligible taxpayer earns long-term capital gains from transferring land, building or both. | REINVESTMENT Invest in eligible specified bonds within 6 months after transfer. Eligible bonds include applicable NHAI, REC and other notified bonds, subject to current availability and conditions. | INVESTMENT AMOUNT Invest the eligible capital gain, subject to the ₹50 lakh statutory investment limit and related conditions. Learn about Section 85 to save capital gains tax . |
| Section 86 Section 54F ( Now Section 86 ) Reinvestment in a residential house | WHEN IT APPLIES An eligible individual or HUF transfers a long-term capital asset other than a residential house. Examples may include land, gold, shares or commercial property. | REINVESTMENT Purchase or construct one residential house in India within the prescribed period, subject to house-ownership and other conditions. | INVESTMENT AMOUNT Generally, full exemption requires qualifying investment of the net sale consideration, subject to the statutory ₹10 crore new-house cost limit. Partial investment may give proportionate exemption . |
Capital Gain vs Net Sale Consideration: What's the Difference?
Capital Gain-Based Exemption
Under Section 54 ( Now Section 82 ), qualifying residential-house reinvestment is measured against the eligible capital gain. Similarly, Section 54EC ( Now Section 85 ) permits qualifying capital gains to be invested in specified bonds, subject to its ₹50 lakh limit.
Net Consideration-Based Exemption
Under Section 54F ( Now Section 86 ), the net sale consideration matters. Generally, qualifying investment of the full net consideration can result in full exemption, subject to the statutory cap. Investing less generally results in a proportionate exemption.
Can You Claim More Than One Capital Gains Exemption?
Different capital gains exemption provisions may be relevant to a taxpayer's overall transactions. However, you cannot assume that multiple exemptions can be combined freely against the same capital gain. Each section has separate asset eligibility, investment requirements, time limits, exemption calculations and restrictions. Before claiming more than one exemption, check how the qualifying amounts interact and ensure that the same gain or investment is not claimed twice contrary to the applicable rules.
सीधी बात: अगर आपने residential house बेचा है, तो Section 82 relevant हो सकता है। जमीन या building बेचने पर Section 85 के specified bonds भी एक option हो सकते हैं। लेकिन अगर आपने land, gold या shares जैसे eligible long-term assets बेचे हैं और नई residential house खरीदना चाहते हैं, तो Section 86 check करें। Industrial property की compulsory acquisition के लिए Section 84 अलग provision है।
Who Can Claim Exemption Under Section 86?
Under Section 54F ( Now Section 86 ), the capital gains exemption is available only to eligible individual taxpayers and Hindu Undivided Families (HUFs). Companies, partnership firms and other taxpayer categories cannot claim this particular exemption in their own names.
Eligible Taxpayers
An individual who transfers a qualifying long-term capital asset other than a residential house may claim exemption by making the prescribed investment in a residential house in India.
An eligible HUF may also claim Section 86 exemption on qualifying capital gains. The relevant asset, transaction and investment must belong to the eligible HUF for its own claim.
Who Cannot Claim?
Private limited companies, public limited companies and other corporate taxpayers cannot claim this exemption in their own names.
A partnership firm or Limited Liability Partnership (LLP) is not eligible for this individual/HUF-specific exemption.
An Association of Persons (AOP), Body of Individuals (BOI) or another taxpayer entity that is neither an individual nor an HUF cannot claim Section 86 in its own capacity.
Can an NRI Claim Section 86 Exemption?
Potentially, yes. Section 86 does not expressly restrict the exemption to resident individuals. A Non-Resident Indian (NRI) may be eligible where the capital gain is taxable under the applicable Indian tax rules and all Section 86 requirements are met. The qualifying new residential house must be situated in India. Applicable foreign exchange and property acquisition rules should also be considered.
Does Every Individual or HUF Automatically Qualify?
No. Being an individual or HUF is only the first eligibility requirement. The taxpayer must also transfer a qualifying long-term capital asset other than a residential house and invest in the prescribed new residential house in India within the applicable time limits.
Existing house ownership also matters. In general, owning more than one other residential house on the date of transfer can prevent the exemption, subject to the detailed statutory conditions. Buying or constructing additional residential houses within the restricted periods, or transferring the new house within three years, can also affect the exemption.
Practical Example: Individual vs Company
Suppose Mr. Sharma personally owns and sells a qualifying long-term commercial plot. He may be eligible for Section 54F ( Now Section 86 ) if he makes the required residential house investment and satisfies all conditions. However, if the same plot belongs to ABC Private Limited, the company cannot claim Section 86 merely because its director or shareholder intends to purchase a house.
सीधी बात: Section 86 की exemption Individual और HUF के लिए है। Company, LLP या partnership firm इसे अपने नाम पर claim नहीं कर सकती। NRI भी eligible हो सकता है, लेकिन नई residential house भारत में होनी चाहिए और बाकी conditions पूरी करना जरूरी है।
Eligibility Conditions Under Section 86
To claim the capital gains exemption under Section 54F ( Now Section 86 ), you must satisfy the relevant taxpayer, asset, reinvestment and house-ownership conditions. Use this checklist before purchasing or constructing a new residential house.
Basic Eligibility Conditions
Check your taxpayer category, the original asset and existing house ownership.
You Are an Individual or HUF
The taxpayer must be an individual or Hindu Undivided Family (HUF). Companies, firms and LLPs cannot claim Section 86 in their own names.
Original Asset Must Be Long-Term
The transferred asset must qualify as a long-term capital asset under the applicable income-tax rules.
Original Asset Must Not Be a Residential House
The original asset cannot be a residential house. Qualifying assets may include land, gold, shares or commercial property.
Existing House Ownership Limit
On the date of transfer, you generally must not own more than one residential house other than the new asset, subject to the detailed statutory conditions.
Residential House Investment Conditions
The new asset must meet the prescribed location, time limit and investment rules.
Invest in One Residential House in India
The new asset must be one qualifying residential house situated in India.
Buy Within the Prescribed Window
Purchase the new residential house within 1 year before or 2 years after transfer of the original asset.
Construct Within 3 Years
Alternatively, construct the new residential house within 3 years after the original asset's transfer.
Deposit Eligible Unutilised Amount in CGAS
If the qualifying net sale consideration remains unutilised at the relevant filing stage, the required amount must be deposited under the Capital Gains Account Scheme (CGAS) before filing the return and no later than the applicable ITR due date, subject to statutory limits.
Remember: You do not need to both purchase and construct separate houses. Purchase and construction are alternative routes to acquiring the qualifying new residential house.
Ownership and Post-Claim Conditions
Avoid transactions that may disqualify an initial claim or make an earlier exemption taxable.
Avoid Purchasing Another House
Buying another residential house other than the new asset within 1 year after transfer can affect initial eligibility. A qualifying additional purchase within 2 years after transfer can also trigger taxation of an earlier exemption.
Avoid Constructing Another House
Constructing an additional residential house other than the new asset within 3 years after transfer can affect or withdraw the exemption under the applicable conditions.
Do Not Transfer the New House Too Early
Transferring the new residential house within 3 years from its purchase or construction can cause the previously exempt capital gains to become taxable.
Apply the Correct Exemption Calculation
Full or partial exemption depends on the eligible net consideration and qualifying new house cost. For the exemption calculation, new house cost exceeding ₹10 crore is not considered.
Important: Passing This Checklist Does Not Guarantee Exemption
Section 86 contains initial eligibility conditions and separate rules under which an exemption may become taxable later. The treatment of another house also depends on the statutory income-from-house-property condition. Your capital gains calculation, investment documents, CGAS requirements and filing details must be reviewed before making a claim.
Key Takeaway: Section 86 Eligibility
Section 54F ( Now Section 86 ) applies to qualifying individuals and HUFs who transfer a long-term capital asset other than a residential house and reinvest in one residential house in India. Correct investment timing, existing house ownership, applicable CGAS deposits and subsequent property transactions are all important in determining whether the exemption can be claimed and retained.
सीधी बात: Section 86 में exemption पाने के लिए सही long-term asset बेचना, नई residential house में तय समय के अंदर investment करना और दूसरी house ownership की conditions पूरी करना जरूरी है। अगर पैसे अभी invest नहीं हुए, तो CGAS deposit की जरूरत भी पड़ सकती है।
Time Limits Under Section 86
Under Section 54F ( Now Section 86 ), the timing of your residential house investment is critical. You may purchase a house before or after transferring the original asset, or construct a house within the prescribed period. Here's how the deadlines work.
Earliest qualifying house purchase window.
The date used to calculate the post-transfer windows.
Purchase a qualifying residential house.
Construct the qualifying residential house.
| Activity | Applicable Time Limit |
|---|---|
| Purchase Before Transfer | Within 1 year before the date of transferring the original long-term capital asset. |
| Purchase After Transfer | Within 2 years after the date of transfer of the original asset. |
| Construction of New House | Within 3 years after the date of transfer of the original asset. |
| Capital Gains Account Scheme Deposit | Where required, deposit the eligible unutilised net consideration before filing the ITR and no later than the applicable return-filing due date under Section 139(1) ( Now Section 263(1) ) . |
Does CGAS Give You an Extra 2 or 3 Years to Deposit Money?
No. The Capital Gains Account Scheme (CGAS) deposit deadline is separate from the house purchase or construction deadline.
If the qualifying net sale consideration has not been fully utilised by the relevant return-filing stage, the amount required for the exemption must be deposited under the notified scheme before filing the return and no later than the applicable statutory filing due date.
The deposited amount must then be utilised for the qualifying house within the applicable purchase or construction window. Proof of deposit is required under Section 86(2).
Example: Property Sold on 1 July 2026
Suppose an eligible taxpayer transfers a qualifying long-term capital asset on 1 July 2026. The main investment windows would generally be:
Important: Do Not Confuse the Different Deadlines
A qualifying house purchased before the sale may still be eligible under Section 86. However, a future house purchase or construction deadline does not automatically extend the CGAS deposit deadline. Missing the required deposit deadline or failing to utilise deposited funds within the permitted period may affect the exemption and lead to taxation under the applicable provisions. The exact ITR due date depends on the taxpayer category and applicable extensions.
सीधी बात: Asset बेचने से 1 साल पहले खरीदा गया घर भी qualify कर सकता है। Sale के बाद घर खरीदने के लिए 2 साल और construction के लिए 3 साल का समय है। लेकिन अगर पैसा अभी invest नहीं हुआ और CGAS deposit जरूरी है, तो ITR की applicable due date का इंतजार किए बिना सही समय पर deposit करना जरूरी है।
How Capital Gains Exemption Is Calculated Under Section 86
Under Section 54F ( Now Section 86 ), your Long-Term Capital Gains (LTCG) exemption depends on how much qualifying net sale consideration you invest in a new residential house. Full investment may result in full exemption, while partial investment generally gives a proportionate exemption, subject to the ₹10 crore limit and other statutory conditions.
Key Terms Used in Section 86 Calculation
What Is Net Consideration?
Net Consideration means the full sale consideration received or accruing on transfer of the original capital asset, reduced by expenditure incurred wholly and exclusively in connection with that transfer.
Examples of qualifying expenses may include eligible brokerage or legal fees directly connected with the sale.
What Is the Cost of the New Asset?
The cost of the new asset is the qualifying cost of purchasing or constructing one residential house in India. For the exemption calculation, eligible amounts deposited in the Capital Gains Account Scheme (CGAS) may also be treated as part of the cost under Section 86(3).
CGAS deposits must satisfy the applicable deadline and utilisation conditions. The same amount cannot be counted twice.
Section 86 Partial Exemption Formula
When the net consideration exceeds the eligible cost of the new residential house:
Remaining taxable LTCG = Total LTCG − Exempt LTCG. This calculates the remaining capital gain, not the final amount of income tax.
When Is Full Exemption Available?
When the qualifying cost of the new residential house is equal to or higher than net consideration, the entire eligible LTCG may be exempt.
This remains subject to the ₹10 crore new-house cost limit and the other Section 86 conditions.
When Is Partial Exemption Available?
When the net consideration is greater than the eligible new house cost, the exemption is calculated in proportion to the qualifying investment.
The balance of the LTCG remains taxable under the applicable capital gains rules.
Section 86 Capital Gains Exemption Examples
The following examples assume an eligible individual/HUF, a qualifying long-term capital asset, direct investment in the new house and satisfaction of all other Section 86 conditions.
Example 1 — Full Exemption
FULLExplanation: The qualifying investment is greater than the net consideration. Therefore, the entire eligible LTCG may be exempt.
Example 2 — Partial Exemption
PARTIALExplanation: The taxpayer invested 70% of net consideration. Therefore, 70% of eligible LTCG may be exempt.
Example 3 — Lower Reinvestment
PARTIALExplanation: Only 40% of net consideration was invested. Therefore, the available exemption is proportionately lower.
Example 4 — ₹10 Crore Cap
HIGH VALUEExplanation: Only ₹10 crore of the ₹12 crore new house cost is considered. The denominator remains ₹14 crore net consideration. Therefore, the exemption is partial, not full.
Important: How Does the ₹10 Crore Limit Work?
Section 86(8): If the actual cost of the new residential house exceeds ₹10 crore, the amount above ₹10 crore is ignored for calculating the exemption under Section 86(1).
Section 86(9): If net consideration exceeds ₹10 crore, the excess is excluded for the specific CGAS deposit provision under Section 86(2). This does not mean net consideration is automatically capped at ₹10 crore in the exemption formula under Section 86(1).
Example: If net consideration is ₹14 crore and the qualifying new house costs ₹12 crore, the calculation uses ₹10 crore as new asset cost and ₹14 crore as net consideration.
Does a CGAS Deposit Count as Investment?
Under Section 86(3), eligible amounts already used to purchase or construct the new house, together with eligible amounts deposited under Section 86(2), may be treated as the cost of the new asset for the exemption calculation, subject to the applicable limit. However, if the deposited amount is not utilised within the prescribed period, the earlier exemption may be recalculated and the relevant amount may become taxable under Section 86(4).
Key Takeaway
Under Section 54F ( Now Section 86 ), the key comparison is between net sale consideration and the eligible cost of the new residential house. Full qualifying investment may result in full exemption where the statutory conditions and ₹10 crore cost cap permit it. Lower qualifying investment generally results in proportionate LTCG exemption.
सीधी बात: Section 86 में सिर्फ capital gain invest करने से full exemption जरूरी नहीं मिलेगी। कितना net sale consideration मिला और नई house में कितना eligible investment किया, यही calculation का आधार है। ध्यान रखें, ₹10 crore की house-cost limit का मतलब यह नहीं कि ₹14 crore की sale consideration को भी formula में ₹10 crore मान लिया जाए।
Capital Gains Account Scheme (CGAS) Under Section 86
What if you sell a long-term capital asset but cannot immediately purchase or construct your new residential house? The Capital Gains Account Scheme (CGAS) can help preserve a qualifying Section 54F ( Now Section 86 ) exemption while the permitted house-investment period is still open.
When Is a CGAS Deposit Required?
If you intend to count unutilised net sale consideration towards your Section 86 exemption, and it has not been used for qualifying house purchase or construction by the relevant return-filing stage, you must comply with the CGAS deposit requirement under Section 86(2).
A CGAS account is not an ordinary savings account. The amount must be deposited with a specified bank or institution under the applicable notified scheme.
And no later than the applicable Section 139(1) ( Now Section 263(1) ) return-filing due date.
How Does the Capital Gains Account Scheme Work?
Open a CGAS Account
Approach a bank or institution authorised under the applicable Capital Gains Account Scheme. Complete the required account-opening and identity documentation.
Deposit the Eligible Unutilised Amount
Deposit the required unutilised net consideration before filing the ITR and no later than the applicable statutory due date. Keep the deposit receipt.
Report the Deposit With Your ITR
Provide the relevant CGAS deposit particulars and proof as required. Under Section 86(3), eligible investment plus qualifying deposit can be considered in the exemption calculation, subject to statutory caps.
Use the Funds for the New House
Withdraw and utilise funds according to the scheme rules for qualifying house purchase or construction, within the 2-year purchase or 3-year construction window after the original asset transfer, as applicable.
What Is the ₹10 Crore CGAS Limit?
Under Section 86(9), net consideration above ₹10 crore is excluded for the purpose of the CGAS deposit provision in Section 86(2). Separately, Section 86(8) limits the new house cost considered in the exemption calculation to ₹10 crore. These are different restrictions and must not be confused.
What Happens if CGAS Money Is Not Fully Utilised?
Under Section 86(4), where qualifying CGAS funds remain unused after the permitted house-investment period, the relevant part of the previously exempt LTCG becomes taxable under Section 45 ( Now Section 67 ).
The law uses the following exemption recapture formula.
Originally Exempt Capital Gains
The amount of capital gains initially exempted under Section 86(1), counting the qualifying investment and eligible CGAS deposit.
Exemption Based on Actual Utilisation
The amount of capital gains that would remain exempt if only the qualifying amount actually spent on the new house were considered as its cost.
Example: Part of the CGAS Deposit Remains Unused
Assume the taxpayer satisfies all other Section 86 conditions. The following numbers show how the exemption can be recalculated if part of the CGAS deposit is not ultimately used.
The ₹30 lakh unused CGAS balance is not the same as the ₹18 lakh capital gains recapture. Section 86(4) recalculates the exemption based on actual qualifying investment.
When Does the Unused Deposit Become Taxable?
The relevant recaptured amount is charged in the Tax Year in which three years from the original asset transfer expire, under Section 86(4).
The taxpayer is entitled to withdraw eligible unused amounts according to the scheme's rules. An account withdrawal and the income-tax recapture calculation are separate matters.
Transition note: If CGAS funds were originally deposited under Section 54F ( Now Section 86 ) before 1 April 2026, the transitional provisions may preserve the old-law conditions for that earlier claim.
सीधी बात: अगर आपने asset बेच दिया है, लेकिन नई house अभी नहीं खरीदी, तो eligible पैसा CGAS में समय पर deposit करना पड़ सकता है। बाद में house खरीदने या बनाने के लिए उसी पैसे को rules के अनुसार use करें। अगर कुछ पैसा unused रह गया, तो पहले मिली tax exemption का हिस्सा वापस taxable हो सकता है।
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When Section 86 Benefit Can Be Withdrawn
Under Section 54F ( Now Section 86 ), there is an important difference between not qualifying for the exemption and losing an exemption already claimed. Existing house ownership, buying another residential house and selling the new house too early can affect your Long-Term Capital Gains (LTCG) exemption.
Initial Disqualification
The exemption under Section 86(1) may be unavailable if the statutory ownership or additional-house conditions are not satisfied.
- × You own more than one residential house, other than the new asset, on the date of transfer of the original asset.
- × You purchase another residential house, other than the new asset, within the one-year period specified in Section 86(5).
- × You construct another residential house, other than the new asset, within the three-year period specified in Section 86(5).
Section 86(5) also includes a condition concerning income chargeable under "Income from house property". The ownership and additional-house clauses must be read together with that condition.
Later Withdrawal of Exemption
Even after qualifying for the Section 86 exemption, a later property transaction may cause the previously exempt LTCG to become taxable.
- ! You purchase another qualifying residential house, other than the new asset, within 2 years after transfer of the original asset.
- ! You construct another qualifying residential house, other than the new asset, within 3 years after the original asset transfer.
- ! Where Section 86(6) applies, the earlier exempt amount becomes chargeable as long-term capital gains in the Tax Year of the additional house purchase or construction.
Section 86(6) applies to an additional residential house whose income is chargeable under the head "Income from house property".
Section 86(7): What If You Sell the New House Within 3 Years?
If you transfer the new residential house within 3 years from the date of its purchase or construction, the capital gain previously exempted under Section 86(1) becomes chargeable as long-term capital gains in the Tax Year in which the new house is transferred.
Any separate capital gain or loss arising from the sale of the new house must be computed under the applicable tax provisions. That computation is separate from the earlier exemption withdrawal.
Why Does Section 86 Mention Both 1-Year and 2-Year Rules?
These time limits relate to different statutory consequences, so they should not be treated as interchangeable.
One-Year Initial Eligibility Rule
The one-year additional-house purchase condition is part of determining whether the exemption under Section 86(1) applies in the first place. The associated house-property-income condition must also be considered.
Two-Year Withdrawal Rule
The two-year window after the original transfer concerns a later purchase of another qualifying house and the taxation of capital gains previously exempted, subject to Section 86(6).
Practical Example: Selling the New House Too Early
Suppose an individual sells qualifying long-term land, purchases a new residential house and validly claims a Section 86 exemption of ₹40 lakh. The following dates are illustrative.
The new house is sold approximately 18 months after purchase, within the three-year period. Therefore, under Section 86(7), the earlier exempt ₹40 lakh becomes taxable as long-term capital gains in Tax Year 2028–29. The tax implications of the new house's sale are considered separately.
Another Withdrawal Risk: Unused CGAS Funds
Section 86(4) separately deals with money deposited in the Capital Gains Account Scheme (CGAS) that is not fully utilised for the qualifying new house within the prescribed period. In that situation, the relevant earlier exempt amount may become taxable under the statutory X − Y recalculation formula. This is different from withdrawing an exemption because another residential house was acquired or the new house was sold early.
Key Takeaway
Initial disqualification concerns whether you were eligible to claim Section 86 in the first place. Later withdrawal concerns capital gains that were initially exempt but become taxable after a restricted transaction. Carefully review both the additional-house purchase/construction windows and the three-year new-house transfer rule before selling or buying another property.
सीधी बात: Section 86 में पहले यह देखना जरूरी है कि exemption claim करने की conditions पूरी हुई थीं या नहीं। अगर exemption मिल चुकी है और बाद में आपने तय समय के अंदर दूसरी house खरीदी या नई house बेच दी, तो पहले बचाया गया capital gains tax फिर से payable हो सकता है।
Section 86 vs Section 54F: Detailed Comparison
Section 54F ( Now Section 86 ) provides capital gains tax relief when eligible taxpayers reinvest qualifying sale proceeds in a residential house in India. The Income-tax Act, 2025 has reorganised this provision, but its key eligibility rules, exemption formula and investment timelines remain substantially similar to the corresponding provision under the earlier Act.
Relevant to income and transactions governed by the earlier tax framework.
Corresponding provision for Tax Year 2026–27 onwards, subject to transition rules.
| Comparison Basis | Section 54F — Old Act | Section 86 — New Act |
|---|---|---|
| Eligible Taxpayers | OLD LAW — SECTION 54F Individuals and HUFs. | NEW LAW — SECTION 86 Individuals and HUFs. Same eligibility category |
| Original Asset Sold | OLD LAW — SECTION 54F A long-term capital asset other than a residential house. | NEW LAW — SECTION 86 A long-term capital asset other than a residential house. Same asset requirement |
| New Asset | OLD LAW — SECTION 54F One residential house in India, subject to statutory conditions. | NEW LAW — SECTION 86 One residential house in India, subject to statutory conditions. Same requirement |
| Exemption Calculation | OLD LAW — SECTION 54F Full or partial exemption based on the net consideration and eligible new-house cost. | NEW LAW — SECTION 86 Full or partial exemption based on the net consideration and eligible new-house cost. Same core formula |
| Full Exemption | OLD LAW — SECTION 54F Entire eligible LTCG may be exempt when qualifying new-house cost is at least the net consideration, subject to the cost cap. | NEW LAW — SECTION 86 Entire eligible LTCG may be exempt when qualifying new-house cost is at least the net consideration, subject to the cost cap. |
| New House Purchase Window | OLD LAW — SECTION 54F 1 year before or 2 years after original asset transfer. | NEW LAW — SECTION 86 1 year before or 2 years after original asset transfer. Same timeline |
| New House Construction Window | OLD LAW — SECTION 54F Within 3 years after original asset transfer. | NEW LAW — SECTION 86 Within 3 years after original asset transfer. Same timeline |
| Existing House Ownership | OLD LAW — SECTION 54F Generally, the taxpayer must not own more than one other residential house on the original transfer date, subject to the statutory house-property-income condition. | NEW LAW — SECTION 86 The same ownership restriction is stated in Section 86(5), together with the applicable house-property-income condition. |
| Initial Disqualification: Buying Another House | OLD LAW — SECTION 54F Purchase of another residential house within 1 year after transfer is covered by the proviso to Section 54F(1), subject to its conditions. | NEW LAW — SECTION 86 Purchase of another residential house within 1 year after transfer is addressed by Section 86(5), subject to its conditions. Not a new restriction |
| Later Withdrawal: Buying Another House | OLD LAW — SECTION 54F Under Section 54F(2), purchasing another qualifying residential house within 2 years after transfer can make previously exempt LTCG taxable. | NEW LAW — SECTION 86 Under Section 86(6), purchasing another qualifying residential house within 2 years after transfer can make previously exempt LTCG taxable. Same later-withdrawal window |
| Capital Gains Account Scheme | OLD LAW — SECTION 54F Eligible unutilised net consideration must be deposited where required, before filing the return and by the applicable statutory due date. | NEW LAW — SECTION 86 The corresponding deposit and utilisation provisions appear in Sections 86(2)–86(4). |
| ₹10 Crore New-House Cost Limit | OLD LAW — SECTION 54F Cost above ₹10 crore is excluded from the exemption calculation, under the cap effective from 1 April 2024. | NEW LAW — SECTION 86 Section 86(8) retains the ₹10 crore new-house cost limit. Limit retained |
| ₹10 Crore Net-Consideration Restriction | OLD LAW — SECTION 54F Net consideration exceeding ₹10 crore is restricted for the CGAS-related provision, under the amendment effective from 1 April 2024. | NEW LAW — SECTION 86 Section 86(9) retains the restriction specifically for Section 86(2). It is not a general cap on the denominator of the exemption formula. |
| New House Lock-In | OLD LAW — SECTION 54F Transfer of the new house within 3 years can trigger taxation of the earlier exemption under Section 54F(3). | NEW LAW — SECTION 86 Corresponding 3-year withdrawal rule appears in Section 86(7). Same lock-in period |
What Actually Changed From Section 54F to Section 86?
The principal change is statutory renumbering and reorganisation under the Income-tax Act, 2025. The basic reinvestment structure, taxpayer category, net-consideration formula, residential house requirement and major investment deadlines are substantially retained.
Do not confuse the two additional-house purchase windows. The 1-year initial eligibility condition and 2-year later withdrawal rule existed under the old Section 54F as well as under the new Section 86.
For income arising during FY 2025–26, the Income-tax Act, 1961 remains relevant. For income arising from 1 April 2026 onward, the Income-tax Act, 2025 applies, subject to relevant transition and saving provisions.
Practical Section 86 Examples by Asset Type
Section 54F ( Now Section 86 ) is not limited to land or commercial property. It can apply to several types of long-term capital assets, provided the transaction is taxable as capital gains and all exemption conditions are satisfied.
Sale of Long-Term Land
Suppose you sell a long-term plot of land that qualifies as a capital asset. If you invest the eligible net sale consideration in one residential house in India within the prescribed period, the entire eligible LTCG may be exempt, subject to the ₹10 crore cost cap and other conditions.
Sale of Long-Term Gold
You sell qualifying long-term gold jewellery and invest only part of the net consideration in a residential house. The exemption is generally proportionate to the qualifying investment, not automatically equal to the full capital gain.
Sale of Commercial Property
An eligible individual sells a long-term commercial shop or office and reinvests in a residential house in India. Section 86 may apply, provided the property qualifies as a long-term capital asset. In high-value transactions, the ₹10 crore new-house cost cap needs particular attention.
Sale of Long-Term Shares
Qualifying listed or unlisted shares held as long-term capital assets may fall within Section 86. The applicable LTCG computation, special tax provisions and eligible investment must be checked before determining the exemption.
NRI Selling an Eligible Capital Asset
A Non-Resident Indian (NRI) may also qualify as an individual under Section 86 where the relevant capital gain is subject to Indian taxation and the statutory requirements are satisfied. The new residential house must be located in India. Additionally, applicable TDS, DTAA, residential status and property acquisition rules should be reviewed.
Important: Not Every Sale Automatically Qualifies
Selling land, gold, shares or commercial property does not automatically guarantee a Section 86 exemption. The asset must qualify as a long-term capital asset; the sale must result in eligible capital gains; and the taxpayer must meet the ownership, reinvestment, CGAS and subsequent transfer conditions. For example, certain rural agricultural land may not qualify as a capital asset for income-tax purposes.
Key Takeaway: Section 86 vs Section 54F
Section 54F ( Now Section 86 ) continues the core exemption for eligible long-term capital gains arising from assets other than residential houses. The major investment timelines, net-consideration calculation, eligibility restrictions and subsequent exemption withdrawal rules remain substantially similar. The most important practical step is to apply the correct Act for the relevant tax period and verify every statutory condition.
सीधी बात: Section 54F का नया corresponding provision Section 86 है। दोनों में मुख्य exemption formula और investment deadlines लगभग समान हैं। इसलिए केवल section number बदलने को नया tax benefit या नई restriction समझना सही नहीं होगा।
Documents Required to Claim Section 86 Exemption
Claiming a Section 54F ( Now Section 86 ) capital gains exemption is not just about investing in a new house. You should maintain proper sale records, investment proofs, capital gains calculations and CGAS documents to support the exemption claimed in your Income Tax Return.
Original Asset Sale Documents
Keep the sale deed, transfer agreement, contract notes or other relevant transaction records. They should support the transfer date, consideration and asset details.
Original Asset Purchase & Cost Records
Retain earlier purchase deeds, acquisition invoices, demat statements or other cost of acquisition records. For inherited assets, keep supporting inheritance and previous-owner acquisition documents, where relevant.
New Residential House Documents
Preserve the purchase deed, registered agreement, builder allotment letter and other relevant documents supporting the qualifying new residential house in India.
House Investment Payment Proofs
Maintain bank statements, NEFT/RTGS records, cheque details, builder receipts and payment schedules. These records help demonstrate the amount and timing of the investment.
Capital Gains Account Scheme Proof
Where CGAS applies, retain the deposit receipt, account statement or passbook, relevant forms and withdrawal records. Also keep evidence showing how withdrawn funds were utilised for the new house.
Transfer Expense Supporting Bills
Preserve eligible brokerage invoices, legal fee bills and other direct transfer expenses. Such expenses must satisfy the statutory conditions before reducing net consideration.
House Construction Records
If you construct the house, keep relevant approved plans, contractor agreements, material invoices, payment records and construction completion evidence.
LTCG & Exemption Computation
Maintain your Long-Term Capital Gains calculation, net consideration working, eligible new house cost, exemption formula and applicable ₹10 crore cap calculation.
Existing House Ownership Records
Keep an accurate record of other residential houses owned on the date of transfer. Relevant ownership documents and property particulars may help substantiate the Section 86 house-ownership conditions.
Filed ITR & Acknowledgement
Save the relevant filed Income Tax Return, capital gains schedules, ITR acknowledgement and tax computation. Preserve supporting correspondence and tax notices, if any.
Do You Need to Attach Every Document to Your ITR?
Generally, no. Electronic Income Tax Returns are ordinarily annexure-less, meaning taxpayers are not generally required to upload every supporting invoice, deed or payment receipt with the return.
However, Section 86(2)(c) specifically refers to submitting proof of a qualifying CGAS deposit along with the return. Follow the prescribed electronic filing instructions, relevant ITR disclosure fields and proof-submission requirements. Keep the deposit evidence available for verification and any future tax proceedings.
Important Practical Rules Before Claiming Section 86
These points help explain the legal and practical considerations involved in a residential house capital gains exemption claim.
What Counts as One Residential House?
Section 86 refers to investment in one residential house in India. Properties involving multiple flats, adjoining units or separate floors can raise fact-specific questions. Physical layout, legal ownership, agreements and applicable judicial interpretations may matter. Do not assume that multiple independently purchased units always count as one house.
Net Sale Consideration Determines the Exemption
Under Section 54F ( Now Section 86 ), reinvestment is compared with net consideration, not merely with the amount of long-term capital gain. If qualifying investment is lower than net consideration, the exemption is generally proportionate, subject to statutory limits and other conditions.
CGAS Deadlines and Actual Utilisation Matter
Where a Capital Gains Account Scheme (CGAS) deposit is required, the amount must be deposited within the applicable statutory return-filing deadline. Subsequently, the funds must be utilised for the qualifying new house within the relevant purchase or construction period. Unused amounts can cause an earlier exemption to become taxable under Section 86(4).
Apply the Enacted Law for the Relevant Tax Year
Section 54F of the Income-tax Act, 1961 remains relevant to transactions governed by the earlier Act. For transactions governed by the Income-tax Act, 2025, refer to the enacted Section 86. Official amendments, applicable rules, transition provisions and relevant judicial decisions should be considered where necessary.
When Should You Consult a CA for Section 86?
Professional review is particularly useful where capital gains calculations, property ownership or investment timelines are more complicated.
NRI Capital Gains
Non-resident taxation, TDS requirements, DTAA provisions and cross-border documentation may affect the transaction.
Jointly Owned Assets
The ownership share, capital gains allocation and individual reinvestment must be correctly established.
Inherited Capital Assets
The relevant holding period, cost of acquisition and previous-owner records may require detailed review.
High-Value Transactions
Deals involving ₹10 crore or more can require special care when calculating the eligible new-house cost and CGAS deposit.
Multiple Residential Properties
Existing house ownership, acquisition of another house and subsequent transfer restrictions may affect eligibility or withdrawal.
House Construction Cases
Construction timelines, payment records, completion evidence and eligible expenditure need proper documentation.
Important: Proper Documentation Supports, but Does Not Guarantee, Exemption
Having all the documents is important, but it does not automatically establish eligibility. A successful Section 86 exemption claim also depends on the nature of the original asset, holding period, net consideration, qualifying reinvestment, house ownership and applicable statutory deadlines. Review the calculation and supporting records before filing.
Key Takeaway: Maintain a Complete Section 86 File
Keep clear evidence of what you sold, when you sold it, how the capital gain was calculated, what residential house you purchased or constructed, and how much you invested. If CGAS is involved, maintain the deposit and utilisation records. Good documentation makes it easier to substantiate your exemption if the Income Tax Department requests clarification.
सीधी बात: Section 86 की exemption claim करने के लिए sale deed, नई house के papers, payment proofs, LTCG calculation और जरूरत पड़ने पर CGAS records संभालकर रखें। सही documents होने से future tax notice या verification में claim explain करना आसान होता है।
Need Help With Section 86 Tax Savings?
Get guidance from CA Sagar Batra on LTCG exemption calculations, residential house reinvestment, CGAS compliance, documentation and tax-saving opportunities under Section 54F ( Now Section 86 ).
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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.