Capital Gains Exemption: Rules, Limits and Reinvestment Options
A capital gains exemption allows taxpayers in India to reduce or eliminate tax liabilities when selling long-term capital assets at a profit. Many articles on this topic still quote foreign tax concepts, like retirement accounts or generic one-year rules that do not exist under Indian law. Under the Income-tax Act 2025, which replaced the Income-tax Act 1961 on 1 April 2026, tax relief on asset sales depends on specific holding periods, asset types, and statutory reinvestment rules. This blog explains how to claim relief under Section 82, Section 85, and Section 86, along with statutory caps, holding restrictions, and deposit account procedures.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers. This page explains statutory provisions. It recommends no specific asset and sets no course of action. The choice is yours.
The short version:
Reinvestment reliefs under Section 82, Section 85, and Section 86 apply exclusively to long-term capital assets; short-term gains are ineligible
Section 82 of the Income-tax Act 2025 (erstwhile Section 54) exempts gains from a residential house reinvested into another residential house in India
Section 85 of the Income-tax Act 2025 (erstwhile Section 54EC) exempts gains from land or buildings invested in notified bonds up to ₹50 lakh within six months
Section 86 of the Income-tax Act 2025 (erstwhile Section 54F) exempts gains from non-residential assets (such as unlisted shares, commercial real estate, or gold) reinvested into a residential house on a net consideration basis
Both Section 82 and Section 86 enforce an aggregate statutory ceiling of ₹10 crore on the cost of the new house
The Capital Gains Accounts Scheme 1988 allows taxpayers to deposit unutilised funds in authorized bank branches before the tax filing due date to safeguard exemption claims
Long-term holding requirements for exemption eligibility
Asset holding duration determines statutory eligibility for claiming reinvestment relief under Indian tax legislation. Long-term capital gains arise exclusively when assets are retained beyond mandatory thresholds, including twelve months for listed securities and twenty-four months for immovable property, establishing the foundational qualification needed before applying any statutory capital gains exemption.
You cannot claim these reinvestment exemptions against short-term capital gains.
The statutory holding periods required under direct tax law are:
Listed Securities: More than 12 months for listed equity shares, equity-oriented mutual funds, and listed Gold ETFs.
Immovable Property: More than 24 months for residential houses, commercial buildings, and land.
Unlisted Securities and Physical Assets: More than 24 months for unlisted shares, physical gold bullion, and jewellery.
If you sell a residential apartment after holding it for 18 months, the resulting profit is short-term. It is added to your income and taxed at your regular slab rate. No reinvestment under Section 82 or Section 85 can be claimed against that gain. If held for 25 months, it becomes a long-term capital asset, making you eligible for statutory reinvestment relief.
For the taxation of market securities, read our blog on capital gains on shares. General tax slab rules are detailed in our blog on income tax.
Section 82: Selling a house to buy another house
Residential house transfers qualify for reinvestment relief under Section 82 of the Income-tax Act 2025, which replaces Section 54 of the 1961 Act. Eligible individuals and Hindu Undivided Families selling a residential property can exempt long-term gains by purchasing another home within two years or constructing one within three years in India.
Section 82 is the standard exemption for homeowners. To qualify, both the property sold and the property acquired must be residential houses located in India.
Timelines for Reinvestment
Purchase: The new house must be purchased within one year before the sale date, or within two years after the sale date.
Construction: If building a house, construction must be completed within three years from the sale date.
Reinvestment Amount and Statutory Limits
You only need to reinvest the capital gain, not the full sale proceeds:
If the new house costs as much as or more than the capital gain, the entire gain is exempt.
If the new house costs less than the capital gain, you pay tax on the remaining balance.
The ₹10 Crore Cap: The cost of the new house eligible for exemption is capped at ₹10 crore. Any investment beyond ₹10 crore is ignored.
Two-House Exception: If your long-term capital gain does not exceed ₹2 crore, you can invest in two residential houses instead of one. This concession can only be claimed once in a lifetime.
For complete real estate tax rules, visit our blog on capital gains tax on property.
Section 85: Investing land or building gains into bonds
Infrastructure bond subscriptions under Section 85 of the Income-tax Act 2025 replace the framework previously governed by Section 54EC of the 1961 Act. Taxpayers transferring land or buildings can exempt long-term gains by investing in notified redeemable bonds within six months, subject to a statutory ceiling of fifty lakh rupees.
Section 85 is designed for sellers who do not want to buy another residential property. It applies to gains from selling land, commercial buildings, or residential properties.
Key Rules and Deadlines
Eligible Bonds: Capital gains must be invested in five-year redeemable bonds issued by the National Highways Authority of India (NHAI), REC Limited, or other issuers specifically notified by the Central Government in the Official Gazette.
Six-Month Window: You must invest within six months from the exact date of transfer of the land or building.
₹50 Lakh Limit: The maximum investment is capped at ₹50 lakh per financial year across the year of transfer and the following financial year.
Five-Year Lock-In: The bonds carry a strict five-year lock-in. If you sell the bonds, convert them into cash, or take a loan against them, the exemption is revoked, and the gain becomes taxable immediately.
The Capital Gains Accounts Scheme does not apply to Section 85. You must subscribe to the bonds directly within six months.
Section 86: Selling non-residential assets to buy a house
Non-residential asset transfers qualify for capital gains relief under Section 86 of the Income-tax Act 2025, corresponding to Section 54F of the 1961 Act. Individuals selling assets such as unlisted shares, commercial property, or gold can claim an exemption by reinvesting their entire net sale consideration into a residential house.
Section 86 applies when you sell capital assets other than a residential house (like commercial land, unlisted shares, or gold) and use the proceeds to buy a home.
The Net Consideration Rule
Unlike Section 82, where you only reinvest the gain, Section 86 requires you to reinvest the entire net sale consideration (sale price minus transfer expenses).
If you reinvest only part of the proceeds, the exemption is proportionate:
Qualifying Restrictions
On the date of the sale, you must not own more than one residential house (other than the new one you are buying).
The cost of the new house is capped at ₹10 crore for the exemption calculation.
Timelines match Section 82: buy within one year before or two years after the sale, or construct within three years.
Exemption comparison across Section 82, Section 85 and Section 86
Statutory exemption parameters differ significantly across eligible transfer assets, reinvestment avenues, statutory investment caps, and mandatory holding timelines. Evaluating these regulatory differences ensures taxpayers select the appropriate legal section, follow mandatory deposit deadlines, and avoid unexpected tax liabilities when redeploying capital across qualifying residential real estate or specified infrastructure bonds.
| Parameter | Section 82 (Old Section 54) | Section 85 (Old Section 54EC) | Section 86 (Old Section 54F) |
|---|---|---|---|
| Asset Sold | Residential house | Land, building, or both | Any long-term asset other than a house |
| Asset Bought | One residential house in India | Notified bonds (NHAI, REC) | One residential house in India |
| Amount to Reinvest | Capital gain only | Capital gain only | Full net sale consideration |
| Statutory Upper Cap | ₹10 crore | ₹50 lakh per financial year | ₹10 crore |
| Time Limit |
Buy: 1 year before / 2 years after Build: 3 years after |
Strictly within 6 months |
Buy: 1 year before / 2 years after Build: 3 years after |
| Lock-In on New Asset | 3 years | 5 years | 3 years |
| Bank Scheme (CGAS) | Permitted | Not permitted | Permitted |
Capital Gains Account Scheme for unutilised funds
Deposit accounts under the Capital Gains Accounts Scheme 1988 provide temporary statutory protection when taxpayers cannot deploy gains before the tax return filing deadline. Depositing unutilised proceeds into authorized public bank accounts safeguards exemption claims under Section 82 and Section 86 while the acquisition or construction window remains open.
If you sell a house in May 2026, you have two years to buy another house or three years to build one. However, your Income Tax Return for FY 2026-27 is due on 31 July 2027.
If you have not finalised a purchase by July 2027, you cannot hold the money in an ordinary savings account and claim the exemption.
Deposit Timeline: You must deposit the unutilised gain (Section 82) or unutilised consideration (Section 86) into an authorized bank under the Capital Gains Accounts Scheme (CGAS) 1988 on or before your return filing due date under Section 139(1).
Account Types: Deposit Account A works like a savings account for ongoing construction withdrawals; Deposit Account B works like a term deposit for a single future payout.
Usage: The funds can only be withdrawn to buy or build the house.
If you do not utilise the money within the statutory three years, the unutilised balance becomes taxable as long-term capital gains in the financial year in which the three-year window expires.
Lock-in periods and statutory clawback rules
Statutory clawback provisions withdraw tax exemptions when taxpayers breach mandatory holding requirements or fail to deploy deposited funds within prescribed statutory windows. Selling a newly acquired residential house within three years or encumbering specified bonds before five years revokes earlier relief, treating previously exempted gains as taxable income in the default year.
Section 82 Clawback: If you sell the new house within three years, its acquisition cost is reduced by the exempted gain, increasing your taxable short-term gain on the sale.
Section 85 Clawback: If you transfer, sell, or take a loan against specified bonds within five years, the exempted gain is taxed as long-term capital gains in that financial year.
Section 86 Clawback: Relief is revoked if you sell the new house within three years, or if you buy another residential house within two years (or build one within three years) from the date of the original sale.
Worked Tax Example: Section 82
An individual sells a residential house in August 2026 for ₹1,50,00,000. The property was originally acquired on 10 August 2024 (post-23 July 2024, so the statutory rate is 12.5% without indexation). The calculated long-term gain is ₹60,00,000. The seller buys another house for ₹45,00,000 in December 2026:
| Step | Detail | Amount |
|---|---|---|
| 1 | Net Long-Term Capital Gain | ₹60,00,000 |
| 2 | Cost of New Residential House | ₹45,00,000 |
| 3 | Exemption Claimed under Section 82 | ₹45,00,000 |
| 4 | Remaining Taxable Gain (₹60L – ₹45L) | ₹15,00,000 |
| 5 | Tax at 12.5% | ₹1,87,500 |
| 6 | Health & Education Cess (4%) | ₹7,500 |
| 7 | Total Tax Payable | ₹1,95,000 |
(Assumptions: Resident individual, basic exemption satisfied, nil surcharge, post-23 July 2024 acquisition. Pre-23 July 2024 real estate transfers by resident individuals/HUFs compare 12.5% without indexation against 20% with indexation under transitional rules.)
For details on how indexation applies to older properties, see our content on the cost inflation index. To review mutual fund capital gains, read our blog on long term capital gain tax on mutual funds.
We are not tax advisers. Confirm your calculation with a chartered accountant.
Common Questions
Section 54 applies when you sell a residential house and buy another residential house. Section 54F applies when you sell non-residential assets (like shares or gold) and buy a residential house. Under the Income-tax Act 2025, Section 54 is replaced by Section 82, and Section 54F is replaced by Section 86.
No. Sections 82, 85, and 86 apply exclusively to long-term capital assets. Short-term capital gains cannot be exempted through real estate reinvestment or infrastructure bonds.
Under Section 85 (erstwhile Section 54EC), the investment limit is ₹50 lakh across the financial year of transfer and the following financial year. The bonds carry a five-year lock-in.
Under Section 82, any unspent deposit balance is taxed as long-term capital gains after the three-year construction period expires. Under Section 86, the taxable portion is calculated proportionately under Section 86(4) based on what was actually spent.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.