Tax Laws and Practice · Capital Gains

Section 85: Capital Gains Not Charged on Investment in Specified Bonds

Updated 11 October 2026 · Fact-checked

Under section 85, long-term capital gains from transferring land or building are not charged to tax to the extent you invest them within six months in specified bonds (NHAI or REC, or notified bonds). The investment is capped at ₹50 lakh, and the bonds must not be transferred, converted into money or pledged for a loan within five years.

Understand Investment in Specified Bonds (Section 85)

Section 85 gives relief when you sell land or building at a long-term gain. If you put that gain into specified bonds, the tax under section 67 is not charged on the amount invested. The idea is simple: the gain is not spent, it is parked in infrastructure bonds for a fixed period.

The original asset must be land or building, or both, and the gain must be long-term capital gain. A gain on shares, gold or a short-term asset does not qualify. The investment is made out of the capital gain, not out of the full sale price.

The new asset is a long-term specified asset. This is a bond that is redeemable after five years, issued on or after 1 April 2018, by the National Highways Authority of India or the Rural Electrification Corporation Limited. Any other bond notified by the Central Government also qualifies.

Three conditions control the exemption. You must invest within six months after the date of transfer. The total investment cannot exceed ₹50 lakh, counted either in one tax year or across the year of transfer and the next tax year. The bonds must be held for five years. If you transfer them, convert them into money, or take a loan or advance on their security, the exempt gain becomes long-term capital gain of the year in which this happens.

There is also a no-double-benefit rule. If you count the investment for section 85, you cannot claim a deduction under section 123 for the same investment.

Key rules to remember

Exempt gain when investment is less than the gain: Gain charged under section 67 = Long-term capital gain − Investment in bonds; Applies where the gain exceeds the investment. The part invested is not charged.
Full exemption: If investment ≥ capital gain, whole gain is not charged; Investment above the gain gives no extra benefit. The maximum counted investment is ₹50 lakh.
Time limit for investment: Invest within 6 months after the date of transfer; Counted from the date of transfer of the land or building, not from the end of the tax year.
Investment ceiling: Investment ≤ ₹50,00,000 in a tax year, or in the year of transfer and the next tax year together; The cap covers gains from one or more original assets.
Lock-in and withdrawal: Transfer or conversion into money within 5 years of acquisition: exempt gain is deemed long-term capital gain of that tax year; A loan or advance on the security of the bond is treated as conversion into money on the date of the loan.
Eligible bond: Bond redeemable after 5 years, issued on or after 1 April 2018, by NHAI or REC, or any other notified bond; Check the issuer, the issue date and the redemption term.

How to solve Investment in Specified Bonds (Section 85) questions

Use this order for any question on exemption through specified bonds. It checks eligibility first and then does the arithmetic.

1Check the original asset. It must be land or building, or both. If it is anything else, section 85 does not apply.
2Confirm that the gain is long-term. Compute the long-term capital gain first.
3Note the date of transfer and the date of investment. The bonds must be bought within six months after the transfer.
4Check the bond. It must be an NHAI or REC bond redeemable after five years and issued on or after 1 April 2018, or a notified bond.
5Apply the ₹50 lakh ceiling to the investment, across the allowed tax years. Take the lower of the gain and the eligible investment.
6Compute the exempt amount and the gain still charged under section 67: gain minus eligible investment, if the gain is higher.
7If the facts mention a sale, loan or advance within five years, withdraw the exemption. Treat the exempt gain as long-term capital gain of that year.
8Write the conclusion in ICSI style: the provision, your working, and a clear final answer.

Quickest way: Three-check method for section 85

When to use it: Use it when the question gives dates, a gain and an investment amount, and asks how much is taxable.

Check the asset, the six-month window and the bond issuer.
Eligible investment = lower of the amount invested and ₹50,00,000.
Taxable gain = long-term gain − eligible investment, not below nil. Then scan for any early transfer, conversion or loan within five years.

Common mistakes in Investment in Specified Bonds (Section 85)

Applying section 85 to gains from shares, gold or other assets.
Students remember the popular name 'capital gain bonds' and forget the asset condition.
Fix: Always state first that the original asset must be land or building, or both, with a long-term gain.
Investing the full sale price and expecting exemption on all of it.
Students confuse this with provisions that look at net consideration.
Fix: Under section 85 the investment is made from the capital gain. Exemption cannot exceed the gain.
Ignoring the ₹50 lakh ceiling.
Students focus on the gain and skip sub-section (2).
Fix: Cap the eligible investment at ₹50 lakh before comparing with the gain.
Counting six months from the end of the tax year.
Other provisions use tax-year deadlines, so students mix them up.
Fix: The six months run from the date of transfer of the original asset.
Missing that a loan against the bonds ends the exemption.
Students look only for sale of the bonds.
Fix: A loan or advance on the security of the bonds is deemed conversion into money on that date. Treat it like a sale.
Claiming section 123 deduction on the same bonds.
Both provisions reward investment, so they look combinable.
Fix: If the investment is used for section 85, no deduction under section 123 is allowed for it.

Worked examples

Example 1

Mr. Raman Iyer sold a building held for five years on 10 July 2026. The long-term capital gain was ₹72,00,000. On 20 November 2026 he bought NHAI bonds (redeemable after five years, issued after 1 April 2018) worth ₹60,00,000. Compute the gain charged under section 67.

Show the solution

The original asset is a building and the gain is long-term, so the asset condition is met.
The investment was made about four months after transfer, within six months.
NHAI bonds of this type are long-term specified assets.
The investment exceeds ₹50 lakh, so the eligible investment is limited to ₹50,00,000.
The gain is ₹72,00,000, which is more than the eligible investment.
Gain charged = ₹72,00,000 − ₹50,00,000 = ₹22,00,000.

Answer: ₹50,00,000 of the gain is not charged under section 67. ₹22,00,000 is charged as long-term capital gain.

Example 2

Ms. Kavita Rao sold land on 5 May 2026 and had a long-term capital gain of ₹30,00,000. She invested the whole gain in REC bonds on 1 September 2026 and took a loan against these bonds on 15 March 2028. What is the tax consequence?

Show the solution

The land is eligible and the gain is long-term.
The investment of ₹30,00,000 was made within six months and is below the ₹50 lakh ceiling, so the whole gain was not charged under section 67.
A loan on the security of the new asset is deemed to convert it into money on the date of the loan, 15 March 2028.
This date is within five years of acquisition on 1 September 2026.
So the gain of ₹30,00,000 earlier not charged is deemed long-term capital gain of the tax year in which 15 March 2028 falls.

Answer: The exemption is withdrawn. ₹30,00,000 is chargeable as long-term capital gain in the tax year of the loan, 15 March 2028.

Exam tips

Begin the answer by stating the four conditions: land or building, long-term gain, six months, and a specified bond.
Show the ₹50 lakh cap as a separate line in your working. Examiners look for it.
In withdrawal questions, name the tax year in which the gain becomes chargeable. It is the year of transfer, conversion or loan, not the year of sale of the original asset.
Cite section 85 for the exemption, section 67 for the charge, and section 123 for the no-double-deduction rule.
Write the Income-tax Act, 2025 sections, not the old Act section numbers, for June 2027.

Practice questions from Capital Gains

Investment in Specified Bonds (Section 85) in other exams

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

Investment in Specified Bonds (Section 85): frequently asked questions

Which bonds qualify under section 85?

Bonds redeemable after five years and issued on or after 1 April 2018 by NHAI or REC qualify. Any other bond notified by the Central Government for this section also qualifies.

What is the maximum investment allowed?

The investment from gains on one or more original assets cannot exceed ₹50 lakh. This limit applies in a tax year, or across the year of transfer and the next tax year together.

What happens if I sell the bonds before five years?

The gain not charged earlier is deemed long-term capital gain of the tax year in which you transfer or convert the bonds into money. Taking a loan or advance on the bonds has the same effect.

Can I claim section 85 on the sale of shares?

No. Section 85 applies only to long-term capital gains from the transfer of land or building, or both.

Can I also claim a section 123 deduction on the same bonds?

No. Where the investment has been taken into account for section 85, no deduction under section 123 is allowed for that investment.