Direct and Indirect Taxation · Capital Gains

Capital Gains Exemption on Residential House and Agricultural Land

Updated 10 October 2026 · Fact-checked

Under the Income-tax Act, 2025, an individual or HUF can avoid tax on long-term capital gains by reinvesting in a residential house (sections 82 and 86) or in new agricultural land (section 83). Match the amount, time limit and holding period conditions. Park unused money in the notified deposit scheme before the return due date.

Understand Exemptions from Capital Gains on Residential House and Agricultural Land

Tax law tries not to tax gains that you plough back into a home or farmland. These provisions give relief only to an individual or HUF. The relief is not automatic. You must reinvest within a time limit, and you must keep the new asset for a minimum period.

There are three sections to separate in your mind. Section 82 applies when you sell a residential house whose income is taxed as house property, and buy or build another house. Section 83 applies when you sell agricultural land and buy other agricultural land. Section 86 applies when you sell any long-term capital asset that is not a residential house (shares, gold, plots) and put the money into a house.

The key difference is what you must reinvest. Under sections 82 and 83 you reinvest the capital gains. Under section 86 you reinvest the net consideration, which is the sale price less expenses wholly and exclusively connected with the transfer. This is why section 86 needs a much larger investment for full relief.

If you cannot buy or build the new asset before you file the return, you deposit the unused amount in a specified bank or institution under the scheme notified by the Central Government (the capital gains account scheme). The deposit must be made on or before the due date of the return under section 263, with proof attached to the return. The deposit counts as cost of the new asset. If you do not use it in time, it becomes taxable.

Exemption is also withdrawn if you break the conditions later, for example by selling the new asset within three years. Questions test the arithmetic, the time limits and these withdrawal rules.

Key rules to remember

Section 82: original asset and new asset: Original: long-term residential house (income taxed as house property). New: one house in India, bought 1 year before or 2 years after transfer, or built within 3 years after; Taxpayer must be an individual or HUF. Under section 82(5) and (6), the assessee may opt for two houses as the new asset if the capital gain does not exceed ₹2 crore. Once the option has been exercised, it cannot be exercised again for the same tax year or any other tax year.
Section 82: amount exempt: If gain > cost of new asset: taxable gain = gain − cost of new asset. If gain ≤ cost of new asset: nil; Reinvest the capital gain, not the full sale price. Two separate ₹10 crore caps apply. Under section 82(7), cost of the new asset above ₹10 crore is ignored for section 82(1). Under section 82(8), capital gains above ₹10 crore is ignored only for the deposit under section 82(2).
Section 82: cost of new asset if sold within 3 years: Cost = nil (if gain exceeded cost of new asset), else cost − capital gain exempted; Use this when computing gain on a later sale of the new house within 3 years of purchase or construction.
Section 83: agricultural land: Land used for agriculture by the assessee or parent/HUF in the 2 years before transfer. New asset: other agricultural land bought within 2 years after transfer; If gain > cost of new land, the excess is taxable and the cost is nil for a transfer within 3 years. If gain ≤ cost, nil gain is charged and the cost is reduced by the gain.
Section 86: proportionate exemption: If net consideration > cost of new asset: exempt gain = capital gains × cost of new asset ÷ net consideration. If net consideration ≤ cost of new asset: whole gain exempt; Original asset is a long-term capital asset that is not a residential house. New asset is one house, bought 1 year before or 2 years after, or built within 3 years. Under section 86(8), cost of the new asset above ₹10 crore is ignored when applying section 86(1), so use the cost up to ₹10 crore in the proportion.
Section 86: net consideration: Net consideration = full value of consideration − expenditure wholly and exclusively on transfer; Under section 86(9), net consideration above ₹10 crore is ignored only for the deposit rule in section 86(2). It does not change the net consideration used in the proportion under section 86(1).
Capital gains account deposit: Deposit the amount not used for the new asset before filing the return, and not later than the due date under section 263. Attach proof; The deposit is needed for the amount not used to purchase or construct the new asset before the return is filed. It is not needed for the amount already used, for example a house bought within 1 year before the transfer. Amount already used plus deposit is deemed the cost of the new asset. Unutilised deposit: under sections 82 and 83 it is charged in the tax year in which the period expires (3 years from transfer for section 82, 2 years for section 83). Under section 86 it is charged in the tax year in which 3 years from transfer expire, using X − Y.
Section 86: charge on unutilised deposit: Taxable amount = X − Y, where X = gain not charged earlier, Y = gain that would have been exempt if cost of new asset were only the amount actually utilised; It is taxed as income of the tax year in which three years from the date of transfer expire. The assessee can withdraw the unused deposit under the scheme.
Section 86: withdrawal conditions: Section 86(7): new asset sold within 3 years of purchase or construction: exempt gain is charged as long-term capital gains of the year of sale. Section 86(6): another house taxed as house property bought within 2 years, or built within 3 years, after the transfer: exempt gain is charged as long-term capital gains of the year of that purchase or construction; Section 86(5): the exemption does not apply if the assessee owns more than one residential house other than the new asset on the transfer date, or buys another house within 1 year, or constructs another house within 3 years, of the transfer, and the income from that house (other than the one house owned on the transfer date) is taxable under the head Income from house property.

How to solve Exemptions from Capital Gains on Residential House and Agricultural Land questions

Use this order for any question on reinvestment exemptions. It stops you applying the wrong section.

1Check the assessee. Only an individual or HUF qualifies. A company or firm gets no relief under these sections.
2Identify the original asset and decide the section: residential house (section 82), agricultural land (section 83), or other long-term asset (section 86). Confirm the gain is long-term for section 82 and 86.
3Compute the capital gain first. Also compute net consideration if section 86 applies.
4Check the timing. For houses: purchase 1 year before or 2 years after, or construction within 3 years after. For land: purchase within 2 years after. Compare with the dates given.
5Apply the formula. Section 82 and 83: compare gain with cost of new asset. Section 86: take gain × cost of new asset ÷ net consideration when net consideration is higher.
6Handle the deposit. If the money is unused at return filing, check that it was deposited by the due date under section 263. Add the deposit to the cost of the new asset.
7Check for withdrawal. Look for a sale of the new asset within 3 years, a second house, or deposit not used within the period, and charge the amount in the correct tax year.
8Write the final taxable gain and the cost of the new asset for future computation.

Quickest way: Section 86 fast check: proportion first

When to use it: Use when the question gives sale price, expenses, cost of new house and asks for the taxable gain from a share or plot sale.

Net consideration = sale price − transfer expenses.
If investment ≥ net consideration, gain is fully exempt. Stop.
If not, exempt gain = gain × investment ÷ net consideration.
Taxable gain = gain − exempt gain.
For sections 82 and 83, skip the proportion. Taxable gain = gain − investment, minimum nil.

Common mistakes in Exemptions from Capital Gains on Residential House and Agricultural Land

Reinvesting only the gain under section 86
Students mix the section 82 rule with section 86.
Fix: Section 86 uses net consideration and a proportion. Sections 82 and 83 use the gain.
Using the full sale price instead of net consideration
Students forget to deduct expenses of transfer.
Fix: Deduct brokerage and other expenditure wholly and exclusively connected with the transfer.
Ignoring the time limits for purchase or construction
The periods differ across houses and land.
Fix: Write the dates on a timeline. House: 1 year before, 2 years after, 3 years for construction. Agricultural land: 2 years after.
Treating the capital gains deposit as a free choice
Students forget that the deposit must be made before filing the return and by the due date.
Fix: State the deposit rule and say that proof must go with the return.
Not reducing cost of the new asset when it is sold within 3 years
Students forget the exemption affects later computation.
Fix: Under sections 82 and 83, reduce the cost by the exempt gain, or take it as nil if the gain exceeded the cost. Under section 86, the exempt gain itself is charged on sale within 3 years.
Applying section 83 to land that was not used for agriculture
Students see land and apply the section automatically.
Fix: Check that the assessee or parent, or the HUF, used it for agriculture in the two years before transfer.

Worked examples

Example 1

Mr. Rajesh Iyer sold a residential house (let out; held for 5 years) in September 2026 and has long-term capital gains of ₹48,00,000. In March 2027 he bought another residential house in India for ₹30,00,000. Compute the taxable long-term capital gain. What is the cost of the new house if he sells it two years later?

Show the solution

The original asset is a long-term residential house taxed as house property, so section 82 applies.
The purchase is within 2 years after transfer, so the timing condition is met.
Gain ₹48,00,000 is more than the cost of the new asset ₹30,00,000.
Taxable gain = ₹48,00,000 − ₹30,00,000 = ₹18,00,000.
The new house is sold within 3 years of purchase, so its cost for computing the later gain is nil, because the gain exceeded the cost.

Answer: Taxable long-term capital gain is ₹18,00,000. ₹30,00,000 is exempt. Cost of the new house is nil if it is sold within 3 years.

Example 2

Ms. Kavya Nair sold unlisted shares held long-term in October 2026 for ₹80,00,000, with transfer expenses of ₹2,00,000. The long-term capital gain is ₹50,00,000. In March 2027, within one year after the transfer, she bought one residential house in India for ₹39,00,000. She owns no other residential house and buys or builds no other house. Find the exempt and taxable gain.

Show the solution

The shares are a long-term asset that is not a residential house, so section 86 applies.
Timing: the house was bought in March 2027, within one year after the October 2026 transfer. This is within the 2 years allowed after transfer, so section 86(1)(b) is met.
Section 86(5) check: she owns no other residential house and buys or builds no other house, so the exemption is not barred.
Net consideration = ₹80,00,000 − ₹2,00,000 = ₹78,00,000.
Net consideration ₹78,00,000 is more than the cost of the new asset ₹39,00,000, so the proportion applies. The cost is below ₹10 crore, so no cap applies.
Exempt gain = ₹50,00,000 × ₹39,00,000 ÷ ₹78,00,000 = ₹25,00,000.
Taxable gain = ₹50,00,000 − ₹25,00,000 = ₹25,00,000.
If she sells the new house within 3 years of purchase, the ₹25,00,000 exempt gain is charged as long-term capital gains of the year of sale.

Answer: Exempt gain is ₹25,00,000 and taxable long-term capital gain is ₹25,00,000.

Exam tips

Write the section number at the top of your answer, then the conditions, then the computation. This earns marks even if the arithmetic slips.
In MCQs, check whether the question mentions net consideration or gain. That decides between sections 86 and 82 or 83.
Compute net consideration separately and show the proportion formula for section 86 in full.
Always state the deposit rule when money is unused: before filing the return, by the due date under section 263, with proof of deposit.
Check the assessee type first. A company or firm questions often hide a nil-exemption answer.

Practice questions from Capital Gains

Exemptions from Capital Gains on Residential House and Agricultural Land 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 on Residential House and Agricultural Land: frequently asked questions

Can a company claim exemption on reinvestment in a residential house?

No. Sections 82, 83 and 86 apply only to an individual or a Hindu undivided family. A company or firm cannot claim these exemptions.

How does the capital gains account scheme work?

If you have not bought or built the new asset before filing the return, you deposit the unused amount in a specified bank or institution under the notified scheme. The deposit must be made on or before the return due date under section 263 and proof must be filed with the return. You can withdraw the money only to buy or build the asset, and unused money is taxed after the period ends.

What is the difference between sections 82 and 86?

Section 82 applies when you sell a residential house, and you reinvest the capital gain. Section 86 applies when you sell another long-term asset and you reinvest the net consideration, with the exemption proportionate when the investment is smaller than the net consideration.

Is agricultural land sale always exempt on reinvestment?

No. Section 83 requires that the land was used for agriculture by you, your parent or the HUF in the two years before transfer. You must buy other agricultural land within two years after the transfer, or deposit the unused gain under the scheme.