Direct Tax Laws & International Taxation · Capital Gains

Exemptions from Capital Gains: Residential House, Agricultural Land and Specified Bonds

Updated 5 October 2026 · Fact-checked

Capital gains exemptions let you avoid tax on a gain by reinvesting the sale proceeds or the gain in a specified asset within a time limit. Identify the asset sold, check the assessee and holding period, compute the exemption from the cost of the new asset, use the Capital Gains Account Scheme if needed, and watch the lock-in.

Understand Exemptions from Capital Gains

A capital gain is taxed in the tax year of transfer. The law, however, gives relief when you put the money back into something it wants to encourage: a home, farmland, or infrastructure bonds. This relief is an exemption by reinvestment. You must meet the conditions. A missed condition makes the gain taxable.

Every exemption has the same four parts. First, who can claim (for example, only an individual or HUF). Second, what you sold (a residential house, urban agricultural land, land or building, or any long-term asset other than a house). Third, what you buy or invest in, and by when. Fourth, a lock-in: if you sell the new asset too soon, the earlier exemption is taken back.

The three big exemptions are these. The residential house exemption covers long-term gain on a residential house, reinvested in another house. The exemption on any other long-term asset covers net consideration reinvested in a house. The agricultural land exemption covers gain on urban agricultural land, reinvested in other agricultural land. The specified bond exemption covers long-term gain on land or building, invested in notified bonds. Each is a separate rule, and exam questions test whether you pick the right one.

If you cannot reinvest before the due date for filing your return, you deposit the unused amount in the Capital Gains Account Scheme (CGAS) with a notified bank. This deposit counts as reinvestment for the exemption. You must then use the money for the purpose within the time allowed. Whatever is left unused becomes taxable in a later year, as the rule specifies.

One point saves many marks: rural agricultural land is not a capital asset, so no capital gain arises and no exemption is needed. Only urban agricultural land is a capital asset. Land counts as urban if it lies within a specified distance of a municipality or cantonment board, with distance set by population.

Key rules to remember

Residential house exemption: who and what: Individual or HUF; long-term gain on transfer of a residential house (income under house property); reinvest in one residential house in India; Buy 1 year before or 2 years after transfer, or construct within 3 years after. Cost of new house counted for exemption is capped at ₹10,00,00,000. Option of two houses applies once in a lifetime if the long-term gain is not more than ₹2,00,00,000.
Residential house exemption: amount: Exemption = lower of (capital gain, cost of new house capped at ₹10 crore); Taxable gain = capital gain − exemption.
Exemption on other long-term asset (not a residential house): Exemption = Cost of new house × Capital gain ÷ Net consideration; full gain exempt if cost of new house ≥ net consideration; Individual or HUF. On the date of transfer you must not own more than one residential house other than the new house. Do not buy another residential house within 2 years, or construct one within 3 years, after transfer. Otherwise the exempted gain becomes taxable. Cost of new house is capped at ₹10 crore.
Lock-in on new house: Transfer within 3 years → cost of new house reduced by exemption claimed; gain is short-term if the new house was held for 24 months or less, long-term if held for more than 24 months; For exemption on the house sold, the reduction applies in computing gain on the new house. The gain is short-term or long-term by the 24-month holding test, so a new house sold after 24 months but within 3 years gives a long-term gain on the reduced cost. For exemption on other assets, the exempted gain is taxed as long-term gain of the year of transfer of the new house.
Agricultural land exemption: Urban agricultural land used for agriculture by the individual or his parent, or by the HUF, for 2 years before transfer; buy other agricultural land within 2 years after transfer; Available only to an individual or HUF (parent's use counts for an individual). Applies to both short-term and long-term gain. Exemption = lower of gain and cost of new land. If the new land is not bought before the due date of the return, deposit the unused amount in CGAS before that date. Lock-in is 3 years: if transferred earlier, cost of new land is reduced by exemption claimed.
Specified bond exemption: Long-term gain on land or building or both; invest in notified bonds within 6 months after transfer; exemption = lower of gain and amount invested; Any assessee. Investment is capped at ₹50 lakh in the tax year of transfer and the next year taken together. Lock-in is 5 years. A loan or advance against the bonds is treated as conversion into money. If you transfer the bonds or convert them into money earlier, the exempted gain is taxed as long-term capital gain of the year in which the bonds are transferred or converted into money.
Capital Gains Account Scheme: Deposit unused amount before the due date of return; withdraw only for the specified purpose; Amount not used within the time allowed is taxable as capital gain of the tax year in which the allowed period ends.
Long-term holding period for immovable property: Held for more than 24 months; Residential house and land or building must meet this to be long-term. For agricultural land exemption, short-term gain also qualifies.

How to solve Exemptions from Capital Gains questions

Use this order for any exemption question. It stops you from claiming the wrong exemption or missing a condition.

1Identify the asset sold and the assessee. Is it a residential house, urban agricultural land, land or building, or another long-term asset? Is the assessee an individual or HUF, or someone else?
2Check the holding period. Decide if the gain is short-term or long-term. Most exemptions need long-term gain (the agricultural land exemption does not).
3Compute the capital gain first, using the full value of consideration, cost and expenses on transfer. Use net consideration where the rule needs it.
4Choose the exemption that matches the asset sold and the asset bought. Check the purchase or construction window and any other condition, such as the number of houses owned.
5Compute the exemption using the exact formula. Apply the cap of ₹10 crore on cost of the new house, and the ₹50 lakh limit for specified bonds.
6If the money is not used before the return due date, check whether a CGAS deposit was made. Treat the deposit as reinvestment. Note any unused amount and the year it becomes taxable.
7Check the lock-in. If the new asset was transferred early, reduce its cost by the exemption claimed or tax the exempted gain as the rule says.
8Write the taxable gain and state the conclusion, with the condition that supports it.

Quickest way: Match, compute, check

When to use it: Use under time pressure in case-scenario MCQs and short written answers.

Match the asset sold to the exemption: house to house, urban farm land to farm land, land or building to bonds, any other long-term asset to a house.
Write the gain and the amount reinvested. Take the lower for the house, farmland and bond exemptions. Use the proportion formula for other long-term assets.
Tick the window: 1 year before or 2 years after (house), 2 years after (farmland), 6 months after (bonds).
Check the lock-in: 3 years for house and farmland, 5 years for bonds.
Subtract the exemption from the gain. State any condition that would reverse the exemption.

Common mistakes in Exemptions from Capital Gains

Claiming the exemption on any gain when the exemption needs long-term gain.
Students remember reinvestment but not the holding period test.
Fix: Always test the holding period first. Only the agricultural land exemption covers short-term gain.
Using cost of the new house instead of net consideration when applying the exemption for other long-term assets.
The house exemption uses the gain, so the two rules get mixed up.
Fix: For other long-term assets, the formula is cost of new house × gain ÷ net consideration. For a house sold, compare the gain with the cost.
Ignoring the ₹10 crore cap and the two-house option.
These limits are recent additions and are easy to overlook.
Fix: Cap the cost of the new house at ₹10 crore. Use the two-house option only once in a lifetime and only if the gain is not more than ₹2 crore.
Missing the 6-month window and the ₹50 lakh limit for specified bonds.
Students apply the 2-year window of house exemption to bonds.
Fix: Bonds must be bought within 6 months after transfer. The CGAS option does not apply to bonds. Cap the investment at ₹50 lakh. Remember that a loan or advance against the bonds counts as conversion into money, and the exempted gain is then taxed as long-term capital gain of that year.
Forgetting to reduce the cost of the new asset after an early sale.
Students compute the gain on the new asset using full cost.
Fix: If the new house or land is transferred within 3 years, reduce its cost by the exemption claimed. Then classify the gain by the holding period of the new asset: short-term if held 24 months or less, long-term if held more than 24 months.
Treating rural agricultural land as a capital asset and claiming exemption.
Students jump to the exemption without checking the definition.
Fix: Check the distance and population test first. Rural land gives no capital gain at all.

Worked examples

Example 1

Meera, a resident individual, sold a residential house on 10 August 2026 for ₹1,20,00,000 net of expenses. She had bought it 5 years ago for ₹40,00,000. Treat cost as ₹40,00,000 with no indexation. Within 8 months she bought another residential house for ₹50,00,000. Compute her taxable long-term capital gain. She sells the new house 20 months after buying it, for ₹70,00,000. Compute the gain on the second sale.

Show the solution

The house was held for more than 24 months, so the gain is long-term.
Long-term capital gain = ₹1,20,00,000 − ₹40,00,000 = ₹80,00,000.
Meera is an individual and bought a new residential house within 1 year before or 2 years after the transfer, so the exemption applies.
Exemption = lower of gain (₹80,00,000) and cost of new house (₹50,00,000, below the ₹10 crore cap) = ₹50,00,000.
Taxable long-term capital gain = ₹80,00,000 − ₹50,00,000 = ₹30,00,000.
The new house is sold within 3 years, so its cost is reduced by the exemption claimed: ₹50,00,000 − ₹50,00,000 = nil.
The new house was held for 20 months, which is 24 months or less, so the gain is short-term.
Short-term capital gain = ₹70,00,000 − nil = ₹70,00,000.

Answer: Taxable long-term capital gain on the first sale is ₹30,00,000. Short-term capital gain on the sale of the new house is ₹70,00,000.

Example 2

Rohan, a resident individual, owns one residential house. On 15 June 2026 he sold unlisted shares held for 3 years for a net consideration of ₹90,00,000. The long-term capital gain was ₹60,00,000. Within 9 months he bought another residential house for ₹54,00,000. Compute the taxable gain. What if he buys one more residential house within 2 years after the transfer?

Show the solution

The shares are a long-term asset that is not a residential house, so the exemption for other long-term assets is considered.
Rohan is an individual and owns only one residential house other than the new house on the date of transfer, so he qualifies.
Cost of new house (₹54,00,000) is less than net consideration (₹90,00,000), so the exemption is proportionate.
Exemption = ₹54,00,000 × ₹60,00,000 ÷ ₹90,00,000 = ₹36,00,000.
Taxable long-term capital gain = ₹60,00,000 − ₹36,00,000 = ₹24,00,000.
If Rohan buys another residential house within 2 years after the transfer, a condition of the exemption is breached. The exempted ₹36,00,000 becomes long-term capital gain of the tax year in which that house is bought.

Answer: Taxable long-term capital gain is ₹24,00,000, with exemption of ₹36,00,000. Buying another house within 2 years makes the ₹36,00,000 taxable in that later year.

Exam tips

In MCQs, read the assessee first. Companies and firms cannot claim the house exemptions, but they can claim the specified bond exemption.
Write the window and lock-in in numbers every time: 1 and 2 years, 3 years, 6 months, 5 years. Examiners award marks for the condition.
Show the formula before computing for other long-term assets. A wrong answer with a right formula still earns marks.
Do the reversal. Many cases add an early sale of the new asset. Say what happens to cost or to the exempted gain.
For CGAS cases, state the deposit date against the return due date and what happens to the unused balance.

Practice questions from Capital Gains

Exemptions from Capital Gains in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Exemptions from Capital Gains: frequently asked questions

How does the Capital Gains Account Scheme work?

If you have not bought or built the new asset before the due date for filing your return, you deposit the unused gain or consideration in a CGAS account with a notified bank. This counts as reinvestment. You withdraw only to buy or build the asset within the allowed time. Any balance unused is taxed as capital gain in the year the allowed period ends.

Can I claim a house exemption on short-term gain?

No. The house exemption and the exemption for other long-term assets need a long-term capital gain. The agricultural land exemption is different, because it covers short-term as well as long-term gain.

Is the sale of agricultural land always exempt?

No. Rural agricultural land is not a capital asset, so there is no capital gain. Urban agricultural land is a capital asset, and you can claim exemption only if you are an individual or HUF and meet the use and reinvestment conditions.

What are the conditions for specified bond exemption?

The gain must be long-term gain on land or building or both. You must invest in notified bonds within 6 months after transfer, up to ₹50 lakh. The bonds have a 5-year lock-in. A loan or advance against them is treated as conversion into money, and the exempted gain is then taxed as long-term capital gain of that year.