Section 85 Capital gains not to be charged on investment in certain bonds.

Income-tax Act, 2025

At a Glance

Clause 85 of the Income Tax Bill, 2025 - (Old Version) provides an exemption mechanism where long-term capital gains from transfer of land or building are not charged if reinvested, within six months, into specified long-term bonds. It affects taxpayers holding capital gains from immovable property and the tax department's assessment of deferred gains. Effective/decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 85 of the Income Tax Bill, 2025. The provision addresses treatment of long-term capital gains arising from the transfer of land or building (original asset) when reinvested into certain long-term bonds (new asset). Definitions/explanations: Clause 85(6) defines "new asset" as any bond redeemable after five years and as notified by the Central Government for the purposes of this section with such conditions (including a condition for providing a limit on the amount of investment by an assessee in such bond). No other statutory cross-references or definitional elaborations are included in the text. Any further definitions (for example, of "long-term capital gains" or "transfer") are Not stated in the document.

Statutory Provision Mode

Text & Scope

Clause 85 applies when: (a) an assessee has long-term capital gains from transfer of land or building (original asset); and (b) within six months of that transfer, the assessee invests whole or part of those capital gains in a "new asset" (long-term bond as defined). The clause prescribes two outcomes: (i) if capital gains exceed the investment in the new asset, the excess is charged u/s 67; (ii) if capital gains are equal to or less than the investment, the whole gain shall not be charged u/s 67. Clause 85(2) caps the amount of investment eligible for this treatment at fifty lakh rupees: this cap applies either during any tax year or in the year of transfer and the subsequent tax year. Clause 85(3) provides anti-avoidance: if the new asset is transferred or converted into money within five years, the previously exempted capital gains are deemed to be income chargeable as long-term capital gains in the tax year of that transfer or conversion. Clause 85(4) treats any loan or advance taken on security of the new asset as "regarded as transfer" of the new asset on the date of the loan/advance. Clause 85(5) disallows deduction u/s 123 for any tax year for investments taken into account under sub-section (1). Clause 85(6) defines "new asset" as described above.

Interpretation

The textual intent is to provide a limited roll-over-like relief (deferment of tax) for long-term capital gains from immovable property where the gains are reinvested into specified long-term bonds. The six-month reinvestment window, five-year holding requirement for the bond, and a monetary cap (Rs. 50 lakh) indicate a legislative balance between incentivising certain public/sector bonds and preventing indefinite tax avoidance. The statutory language indicates a legislative policy to treat the reinvestment as a basis for not charging gains immediately, subject to temporal and monetary safeguards. No explicit legislative history or purposive statement beyond the clause text is provided. Not stated in the document: any legislative note, explanatory memorandum, or policy rationale beyond the text.

Exceptions/Provisos

Clause 85 contains built-in conditions and limits rather than separate provisos: the six-month investment period, the Rs. 50 lakh ceiling (applying as per sub-section (2)), and the five-year retention rule with deeming consequences on breach. There is also a prohibition on claiming deduction u/s 123 for amounts invested under sub-section (1). No other carve-outs, exemptions for particular categories of taxpayers, or transitional provisions are contained in the provision. Not stated in the document: treatment where part of the gains are reinvested beyond Rs. 50 lakh, or where reinvestment occurs after six months but before filing-only the text is available.

Illustrations

• Example 1: An assessee realises long-term capital gain of Rs. 60,00,000 on sale of land. Within six months, the assessee invests Rs. 50,00,000 (all from the gain) in notified bonds qualifying as "new asset". Under Clause 85(1)(i) Rs. 10,00,000 (the excess) is charged u/s 67; Rs. 50,00,000 is not charged u/s 67 (subject to later events such as transfer within five years).
• Example 2: An assessee realises long-term capital gain of Rs. 40,00,000 and within six months invests the whole amount in qualifying bonds. Under Clause 85(1)(ii), the entire gain of Rs. 40,00,000 is not charged u/s 67, provided the bonds are retained for five years.

Interplay

The provision references section 67 (for charging gains) and section 123 (for denial of deduction) but does not elaborate how computations under those sections are to be adjusted. No Rules, Notifications or Circulars are incorporated into the clause beyond the delegation to the Central Government to notify bonds (Clause 85(6)). Not stated in the document: specific interactions with other provisions such as indexation rules, computation of cost of acquisition for the reinvested asset, or the income-tax return disclosure requirements. The clause contemplates notifications with "such conditions" - potential interplay will depend on subsequent notifications issued under that power.

Differences between Section 85 (Income-tax Act, 2025) and Clause 85 (Income Tax Bill, 2025 - Old Version) and practical impact

• Definition / Scope of "new asset"/"long-term specified asset":
  • Bill (Old Version) - Clause 85(6): defines "new asset" broadly as "any bond, redeemable after five years and as notified by the Central Government for the purposes of this section with such conditions (including a condition for providing a limit on the amount of investment by an assessee in such bond)."
  • Act - Section 85(6): uses the term "long-term specified asset" and expressly lists bonds issued by National Highways Authority of India or Rural Electrification Corporation Limited (and any other bond notified), redeemable after five years and issued on or after 1 April 2018.
  • Practical impact: The Act is more prescriptive - it specifies eligible issuers and a temporal cutoff (on or after 1 April 2018). The Bill's language is broader and delegates more to notification, including condition-setting. Under the Act, certain bonds are expressly eligible; under the Bill, eligibility depends more on future notifications and imposed conditions, potentially creating greater administrative discretion and uncertainty for taxpayers until notifications are issued.
• Treatment of loans/advances secured by the new asset:
  • Bill - Clause 85(4): "Any loan or advance taken on the security of the new asset shall be regarded as transfer of the new asset on the date of such loan or advance."
  • Act - Section 85(4): "Any loan or advance taken on the security of the new asset shall be deemed to have converted the new asset into money on the date of such loan or advance."
  • Practical impact: The Bill treats a secured loan/advance as a "regarded" transfer (language typically used to attribute a transfer-like consequence), while the Act treats it as a deemed conversion into money. Both create similar fiscal consequences (loss of exemption), but the Act's "deemed conversion into money" language may better align with triggering chargeability as capital gains and with consequential computations; the Bill's phrasing could raise interpretive questions about whether other modes of transfer treatment apply.
• Terminology and cross-references:
  • Bill and Act: Both refer to charging u/s 67 and denial of deduction u/s 123 when investment is claimed. The Act's text substitutes "long-term specified asset" for the Bill's "new asset" and adds issuer examples and the 2018 date.
  • Practical impact: Terminological differences are modest but the Act's specificity narrows literal scope and clarifies temporal applicability, reducing some uncertainty left by the Bill.

Practical Implications

• Compliance and risk areas: Taxpayers must ensure reinvestment of gains occurs within six months and does not exceed Rs. 50 lakh for the relevant period(s). Failure to comply (late investment, over-investment, or early transfer/encumbrance) triggers chargeability u/s 67 or deeming of previously exempted gains. The clause's treatment of loans/advances secured by the bond as regarded/treated as transfer creates an anti-abuse rule that requires caution before pledging bonds secured against borrowing.
• Record-keeping/evidence: Taxpayers should retain dated proof of sale (showing date of transfer), bank records showing that reinvestment occurred within six months, details of the notified bond (notification reference once issued), and documentation demonstrating retention of the bond for five years. Proof of any loans/advances secured on the bond and the dates of such transactions should be preserved, given the deeming consequence. Not stated in the document: specific forms or returns for claiming the benefit.

Key Takeaways

• Clause 85 creates a limited roll-over relief for long-term capital gains from land/building reinvested in notified long-term bonds within six months.
• The relief is capped at Rs. 50 lakh as to amount permitted in the tax year or across the year of transfer and the subsequent year.
• Deemed chargeability applies if the bond is transferred, converted into money, or (per Clause 85(4)) if a loan/advance is taken on the security of the bond within five years.
• Investment qualifying as "new asset" depends on Central Government notification; the clause contemplates conditions to be imposed by notification, creating dependency on subordinate legislation.
• Deduction u/s 123 is specifically disallowed for investments taken into account under sub-section (1).
• Several practical details (return procedure, computational adjustments, legislative intent beyond the text) are Not stated in the document.

Full Text:

Section 85 Capital gains not to be charged on investment in certain bonds.