Tax Laws and Practice · Capital Gains

Exemptions and Capital Gains Not Charged to Tax under the Income-tax Act, 2025

Q: Who can claim capital gains exemption on reinvestment in a residential house?

Only an individual or HUF can claim it under section 86. The original asset must be a long-term capital asset that is not a residential house. The new asset is one residential house in India.

Q: How does the capital gains deposit scheme work?

If you have not used the net consideration for the new asset before filing your return, you deposit the unused amount in a specified bank or institution under the scheme notified by the Central Government. The deposit must be made before the return due date and the proof attached. You can withdraw it as per the scheme to buy or build the house.

Q: What is the time limit for reinvesting in a house?

You can buy the house within one year before or two years after the transfer. If you construct, you have three years after the transfer. If you miss the period, the unused deposit is taxed in the year when three years from the transfer expire.

Q: Is there an exemption on sale of agricultural land?

Yes, under section 83 for an individual or HUF. The land must have been used for agriculture by the assessee, a parent or the HUF in the two years before transfer. You must buy other agricultural land within two years after the transfer.

Q: What happens if I sell the new house within three years?

The gain that was not charged earlier on the basis of the cost of that new asset becomes taxable as long-term capital gains in the year of sale. This is the claw-back rule in section 86(7).

Updated 11 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 (section 86) or agricultural land (section 83), or by shifting an industrial undertaking to a Special Economic Zone (section 88). Compare the amount reinvested with the net consideration or gain, then apply the stated proportion.

Understand Exemptions and Capital Gains Not Charged

Capital gains are normally charged under section 67. The Act, however, gives relief when you sell an asset and put the money back into a specified new asset. The idea is simple: tax is not charged if the gain is reinvested within the time allowed.

These sections each have an original asset (the one you sell) and a new asset (the one you buy or build). You must check who can claim, what the original asset must be, what the new asset must be, and the time limits.

Section 86 applies only to an individual or HUF. The original asset must be a long-term capital asset that is not a residential house. The new asset is one residential house in India. It must be bought within one year before or two years after the transfer, or constructed within three years after it. If the net consideration is not fully used before you file the return, the unused part goes into a deposit scheme notified by the Central Government.

Section 83 covers land used for agricultural purposes by the assessee, a parent or the HUF in the two years before transfer. The new asset is other agricultural land bought within two years. Section 88 covers an industrial undertaking in an urban area shifted to a Special Economic Zone; the new asset can be plant, building, land or other notified expenses.

The relief is conditional. If you sell the new asset within three years, or break another condition, the exempted gain comes back into charge. This claw-back is a favourite exam point.

Key rules to remember

Net consideration (section 86): Net consideration = full value of consideration − expenditure incurred wholly and exclusively on the transfer; This is the amount compared with the cost of the new asset.
Section 86 exemption where net consideration > cost of new asset: Exempt gain = Capital gain × Cost of new asset ÷ Net consideration; Only this proportion is not charged under section 67. The balance is taxable. Cost of new asset is capped at ₹10 crore.
Section 86 exemption where net consideration ≤ cost of new asset: Exempt gain = whole capital gain; No capital gains are charged under section 67.
Section 86 time limits: Purchase: 1 year before to 2 years after transfer. Construction: within 3 years after transfer; One residential house in India. Unused amount to be deposited before the due date of filing the return under section 263.
Section 86 limits of ₹10 crore: Cost of new asset above ₹10 crore is ignored; net consideration above ₹10 crore is ignored for the deposit rule (sub-section (2)); Learn both limits separately. They apply to different sub-sections.
Section 86 claw-back on unutilised deposit: Taxable = X − Y, where X = gain not charged earlier; Y = gain that would not have been charged if cost of new asset were the amount actually utilised; Charged as income of the tax year in which three years from the date of transfer expire.
Section 86 claw-back on sale of new asset: If new asset is transferred within 3 years of purchase or construction, the gain not charged earlier is charged as long-term capital gains of the year of that transfer; Also applies where you buy or build another income-yielding house under sub-section (6).
Section 83 (agricultural land): If gain > cost of new asset: excess charged; cost of new asset = nil for transfer within 3 years. If gain ≤ cost: no gain charged; cost reduced by the gain; New land bought within 2 years. Unused amount deposited; taxed in the year two years from transfer expire.
Section 88 (shifting to SEZ): If cost and expenses on new asset < gain: difference charged. If ≥ gain: nil charged; Period: 1 year before to 3 years after transfer. Cost of new asset for transfer within 3 years is nil, or reduced by the gain charged.

How to solve Exemptions and Capital Gains Not Charged questions

Use the same order for every question. It stops you missing a condition, which is where most marks are lost.

1Identify the assessee. Sections 86 and 83 are only for an individual or HUF. A company or firm cannot claim them.
2Identify the original asset and check it fits the section. For section 86 it must be a long-term capital asset that is not a residential house. For section 83 it must be agricultural land used as the section requires.
3Compute the capital gain and, for section 86, the net consideration (sale price minus expenses on transfer).
4Check the new asset and its dates against the time limits: buy 1 year before or 2 years after, or construct within 3 years (section 86); 2 years for agricultural land (section 83).
5Check the disqualifying conditions in sub-section (5) of section 86: ownership of more than one other residential house on the date of transfer, or buying or constructing another house, whose income is taxed as house property income.
6Apply the formula: proportion if net consideration exceeds the cost of the new asset, full exemption otherwise. Apply the ₹10 crore caps.
7Deal with unutilised money. It must be deposited under the notified scheme before the return due date. State what happens if the deposit is not used in time.
8Write the conclusion: taxable gain, exempt gain, and any later claw-back event such as sale of the new asset within three years.

Quickest way: Four-line check for a section 86 problem

When to use it: Use this when you have a numerical question and little time.

Line 1: Gain and net consideration. Note whether the asset is a long-term asset, not a house.
Line 2: Cost of the new house, capped at ₹10 crore, and whether dates are within limits.
Line 3: If cost ≥ net consideration, exempt = full gain. Otherwise exempt = Gain × Cost ÷ Net consideration.
Line 4: Taxable gain = Gain − Exempt. Add one sentence on the three-year lock-in.

Common mistakes in Exemptions and Capital Gains Not Charged

Dividing by the sale price instead of net consideration in the section 86 proportion.
Students forget that transfer expenses are deducted first.
Fix: Compute net consideration first: full value minus expenses wholly and exclusively on transfer. Use that in the denominator.
Claiming section 86 when the original asset is a residential house or the assessee is a company.
Students remember the house reinvestment idea but not the exact condition.
Fix: State at the start that section 86 needs an individual or HUF and a long-term asset that is not a residential house.
Using wrong time limits, for example three years for purchase.
Purchase and construction periods are mixed up.
Fix: Purchase: one year before or two years after. Construction: three years after. Agricultural land is two years.
Ignoring the cost of the new asset when it is more than ₹10 crore.
The cap is a late sub-section and is easily overlooked.
Fix: Cap the cost of the new asset at ₹10 crore for the section 86 computation, and cap net consideration at ₹10 crore for the deposit rule.
Forgetting the claw-back when the new asset is sold within three years.
Students stop once the exemption is computed.
Fix: Always add a line on sub-section (7): the gain not charged earlier becomes long-term capital gains of the year of sale.
Treating unused money as exempt without a deposit.
The deposit rule is thought to be optional.
Fix: If the money is not used before filing the return, deposit it under the notified scheme before the return due date and attach the proof.

Worked examples

Example 1

Mr. Ramesh Iyer, a resident individual, sold land (a long-term capital asset, not agricultural) in June 2026. Net consideration was ₹80,00,000 and long-term capital gain was ₹50,00,000. In December 2026 he bought one residential house in India for ₹60,00,000. Compute the capital gain that is not charged and the amount taxable, assuming he has no other house and all conditions are met.

Show the solution

Assessee is an individual. The land is a long-term capital asset that is not a residential house. Section 86 can apply.
The house was bought within two years after transfer, so the time limit is met.
Net consideration ₹80,00,000 exceeds cost of new asset ₹60,00,000, so the proportion rule applies. The cost is below ₹10 crore.
Exempt gain = ₹50,00,000 × ₹60,00,000 ÷ ₹80,00,000 = ₹37,50,000.
Taxable gain = ₹50,00,000 − ₹37,50,000 = ₹12,50,000.
If Mr. Iyer sells the house within three years of purchase, the ₹37,50,000 not charged is charged as long-term capital gains of that year.

Answer: ₹37,50,000 is not charged under section 67. ₹12,50,000 is chargeable as long-term capital gains.

Example 2

Mrs. Meera Nair, an individual, sold a long-term asset (not a house) in July 2026. Net consideration was ₹40,00,000 and gain was ₹25,00,000. She bought a house for ₹45,00,000 in March 2027. Advise on the tax treatment, and state what happens if she had not bought the house before filing the return.

Show the solution

Meera is an individual and the original asset qualifies under section 86.
Purchase is within two years after transfer, so the new asset condition is met.
Net consideration ₹40,00,000 is less than cost of new asset ₹45,00,000. Under section 86(1)(ii), no capital gains are charged under section 67.
Exempt gain is the whole ₹25,00,000, so taxable gain is nil.
If she had not used the net consideration for the house before filing the return, she must deposit the unutilised amount in a specified bank or institution before the due date of filing the return under section 263, and attach the proof of deposit.
If the deposit is not used for the house within the allowed period, the amount determined by X − Y is charged in the year in which three years from the date of transfer expire. She may withdraw the unutilised amount under the scheme.

Answer: No capital gains are charged, so taxable gain is nil. Without the purchase, the deposit rule applies and any unused part is taxed after three years.

Exam tips

Write the section number (86, 83 or 88) in the first line of your answer. ICSI style rewards the provision, then the facts, then the conclusion.
Start every answer with the conditions: who can claim, which asset, and the time limits. Then do the arithmetic.
For numericals, show the proportion formula in full. Even if the arithmetic slips, you can still earn marks for the method.
End with the claw-back. Mention sale of the new asset within three years and the unutilised deposit rule.
Be careful with the three sections. Do not apply the section 86 rule to agricultural land or the SEZ shift, because each has its own limits and effects.

Practice questions from Capital Gains

Exemptions and Capital Gains Not Charged in other exams

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

Exemptions and Capital Gains Not Charged: frequently asked questions

Who can claim capital gains exemption on reinvestment in a residential house?

Only an individual or HUF can claim it under section 86. The original asset must be a long-term capital asset that is not a residential house. The new asset is one residential house in India.

How does the capital gains deposit scheme work?

If you have not used the net consideration for the new asset before filing your return, you deposit the unused amount in a specified bank or institution under the scheme notified by the Central Government. The deposit must be made before the return due date and the proof attached. You can withdraw it as per the scheme to buy or build the house.

What is the time limit for reinvesting in a house?

You can buy the house within one year before or two years after the transfer. If you construct, you have three years after the transfer. If you miss the period, the unused deposit is taxed in the year when three years from the transfer expire.

Is there an exemption on sale of agricultural land?

Yes, under section 83 for an individual or HUF. The land must have been used for agriculture by the assessee, a parent or the HUF in the two years before transfer. You must buy other agricultural land within two years after the transfer.

What happens if I sell the new house within three years?

The gain that was not charged earlier on the basis of the cost of that new asset becomes taxable as long-term capital gains in the year of sale. This is the claw-back rule in section 86(7).