Section 86 Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house.

Income-tax Act, 2025

At a Glance

Clause 86 of the Income Tax Bill, 2025 (Old Version) provides a rollover-like exemption from tax on long-term capital gains arising from transfer of non-residential long-term capital assets where proceeds are applied to purchase or construct one residential house in India within prescribed time windows. It matters to individual and HUF taxpayers who invest sale proceeds into residential property. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 86 of the Income Tax Bill, 2025 (Old Version) is a provision dealing with taxation of long-term capital gains (LTCG) and provides conditions under which such gains are not charged u/s 67 (as referenced in the text). The provision targets individuals and Hindu undivided families (HUFs) who transfer long-term capital assets that are not residential houses and invest the sale proceeds in one residential house in India within specified pre- and post-transfer periods. Definitions and explanations provided in the text: "net consideration" is defined in clause (10) as the full value of consideration received or accruing from the transfer reduced by any expenditure incurred wholly and exclusively in connection with such transfer. No other statutory definitions (for example, "cost", "new asset", "original asset" beyond descriptive usage) are defined in the clause.

Statutory Provision Mode

Text & Scope

The clause applies when an individual or HUF has: (a) LTCG from transfer of a long-term capital asset other than a residential house (termed "original asset"); and (b) purchases within one year before or two years after the transfer, or constructs within three years after the transfer, one residential house in India (termed "new asset"). Where these conditions are satisfied, clause 86 prescribes two outcomes: (i) if the net consideration exceeds cost of the new asset, a proportionate part of the LTCG equal to the ratio of cost of new asset to net consideration shall not be charged u/s 67; (ii) if net consideration is equal to or less than cost of the new asset, no LTCG shall be charged u/s 67.

Interpretation

The provision establishes a proportionate exemption mechanism - only that portion of LTCG corresponding to the amount of sale proceeds reinvested in the new asset (on a cost-to-net-consideration basis) is sheltered. The temporal windows (one year before; two years after for purchase; three years after for construction) are integral to qualify. The clause contemplates deposit of unutilised amounts into a specified bank/institution under a Central Government notified scheme where the proceeds are not immediately applied; such deposits are treated as part of the cost of the new asset for the purpose of computing exemption. The clause also contains anti-abuse measures by disallowing the benefit where the assessee owns more than one residential house (other than the new asset) on date of transfer or acquires/constructs another residential house in specified post-transfer time (with the result that the exemption will not apply where income from such other house is chargeable under "Income from house property").

Exceptions/Provisos

Carve-outs and conditions stated in the clause:

• Deposit requirement: if the capital gains is not utilised (see clause (2)) to purchase/construct the new asset within the specified window, the unutilised amount must be deposited in a specified bank/institution and utilised per a Central Government scheme. The deposit must be made not later than the due date for filing the return of income under the relevant provision; proof of deposit must accompany the return.
• Non-application where multiple houses: clause (5) provides that the relief shall not apply if the assessee already owns more than one residential house (other than the new asset) on the date of transfer, or purchases another residential house (other than the new asset) within two years of transfer, or constructs any residential house (other than the new asset) within three years of transfer, and income from such other house is chargeable under "Income from house property".
• Recapture: clause (4) provides recapture where deposited amounts are not utilised within the three-year period - an amount computed as X - Y (X = capital gains not charged under clause (1); Y = capital gains that would not have been charged if cost of the new asset had been the amount actually utilised) is chargeable u/s 67 in the tax year in which three years from the date of transfer expires; the assessee may withdraw the unutilised amount per the notified scheme.
• Monetary caps: clause (8) disallows taking into account cost exceeding INR 10 crore for purposes of sub-section (1); clause (9) excludes amounts in excess of INR 10 crore of net consideration for purposes of sub-section (2).

Illustrations

• Example 1 (proportionate exemption): Not stated in the document.
• Example 2 (deposit and recapture): Not stated in the document.
• Example 3 (cap application): Not stated in the document.

Interplay

Interaction with other provisions: the clause expressly refers to section 67 for the charging of capital gains and to filing due date provisions (sub-section references). It also contemplates a scheme notified by the Central Government for deposit and utilisation but does not itself specify that scheme. No further rules, notifications, or circulars are cited in the text.

Differences between the two provisions and practical impact

• Reference to the operative amount in sub-section (2): Document 1 (Section 86, Act) refers to "net consideration referred to in sub-section (1) is not utilised", whereas Document 2 (Clause 86, Bill - Old Version) refers to "the capital gains is not utilised".
  • Practical impact: This alters the triggering quantum for deposit and utilisation requirements. "Net consideration" (full value less transfer expenses) and "capital gains" (net consideration minus indexed cost and exemptions) are different magnitudes; using "net consideration" in the Act likely increases the amount required to be deposited and tracked compared to the Bill's "capital gains".
• Timing and filing references for deposit: Document 1 requires the deposit "before the filing of the return and not later than the due date applicable in the case of the assessee for filing the return of income u/s 263; and the proof of deposit shall be submitted along with such return." Document 2 requires deposit "not later than the due date applicable in the case of the assessee for filing the return of income under sub-section (1) of the said section; and the proof of deposit shall be submitted along with the return on or before the due date for filing the return."
  • Practical impact: The Act (Document 1) cites section 263 (a specific provision) for the filing due date; the Bill (Document 2) cites "sub-section (1) of the said section" (less specific in the present text). The Act language is clearer and may shift the applicable due date reference; practical consequences depend on the meaning of the referenced section(s), but the Act's phrasing appears to impose deposit strictly before filing and ties proof submission to that return.
• Ownership/purchase timing that disqualifies exemption: In Document 1 (Act), sub-section (5)(ii) disqualifies benefit if the assessee "purchases any residential house, other than the new asset, within one year of transfer of the original asset." In Document 2 (Bill) that disqualifying period in sub-section (5)(ii) is "within two years of transfer of the original asset."
  • Practical impact: The Bill allowed a longer grace window (two years) for subsequent purchases that would disqualify the exemption; the Act narrows this to one year, tightening the conditions and increasing the risk of losing rollover relief if another residential house is acquired within one year.
• Minor drafting and phrasing variances: There are minor textual differences (e.g., "the amount determined as per with the following formula" in the Bill versus the Act's cleaner formulation).
  • Practical impact: These are drafting-level differences and do not materially change substantive operation, though the Act's clearer drafting reduces interpretive uncertainty.
• Overall practical consequence: The enacted Section (Document 1) moves some triggers and limits (reference to net consideration; shorter disqualification window for purchasing another house) in a direction that narrows relief and increases compliance complexity and deposit obligations relative to the Bill as shown in Document 2. Taxpayers and advisers need to track which quantum (net consideration vs capital gains) triggers deposit, and be vigilant about the one-year window for purchases that may disqualify the benefit in the Act.

Practical Implications

• Compliance and risk areas: Taxpayers must track the timing windows precisely (one year before, two years after for purchase; three years after for construction) to determine eligibility. They must also ensure timely deposit of unutilised amounts with specified institutions per the notified scheme and attach proof with the return; failure to deposit or to meet the timing could trigger full or partial taxation (recapture) u/s 67.
• Record-keeping/evidence: The clause requires proof of deposit to be submitted with the return; consequently, taxpayers should retain authenticated deposit receipts, bank/institutional acknowledgements, evidence of purchase/construction dates, and documentation showing computation of net consideration and cost of new asset. Records supporting the nature of other properties and rent/income chargeability under "Income from house property" will be material where clause (5) is relevant.

Key Takeaways

• Clause 86 provides a limited, conditional exemption from LTCG for individuals/HUFs reinvesting sale proceeds from non-residential long-term assets into one residential house in India within specified time windows.
• The exemption is proportionate: the exempted quantum equals the ratio of cost of the new asset to net consideration applied to the total capital gains; full exemption applies only where cost of new asset equals or exceeds net consideration.
• Unutilised amounts must be deposited in a specified bank/institution per a Central Government scheme by the due date for filing the return; proof must accompany the return.
• Recapture rules operate where deposited amounts are not used within the stipulated three-year period; the clause prescribes a formula (X - Y) to compute taxable recapture.
• Anti-abuse and qualifying conditions include exclusions for taxpayers owning or acquiring additional residential houses (with a two-year purchase disqualification under the Bill) and monetary caps of INR 10 crore on cost and net consideration for certain computations.
• Key definitions are limited; "net consideration" is defined but several operational terms and the Central Government scheme are left to be specified elsewhere.

Full Text:

Section 86 Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house.