Capital gains not to be charged on investment in certain bonds
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 85(1) of Income Tax Act 2025
85(1) Where an assessee has––
- (a) long-term capital gains arising from the transfer of land or building, or both, (original asset); and
- (b) within six months after the date of such transfer, invested whole or part of the capital gains in a long-term specified asset (new asset),
then, the capital gains shall be dealt with as follows:—
- (i) if the capital gains exceed the investment in the new asset, the amount of capital gains as exceeds such investment shall be charged under section 67; or
- (ii) if the capital gains is equal to or less than the investment in the new asset, the whole of such capital gains shall not be charged under section 67.
Section 85(2) of Income Tax Act 2025
85(2) For the purposes of sub-section (1), investment made in the long-term specified asset from capital gain arising from transfer of one or more original asset shall not exceed fifty lakh rupees,––
- (a) during any tax year; or
- (b) in the year of transfer of the original asset or assets and in the subsequent tax year.
Section 85(3) of Income Tax Act 2025
85(3) If the new asset is transferred or converted (otherwise than by transfer) into money within five years of its acquisition, the capital gains not charged under section 67 as per sub-section (1), shall be deemed to be income chargeable as long-term capital gains in the tax year of its transfer or conversion.
Section 85(4) of Income Tax Act 2025
85(4) Any loan or advance taken on the security of the new asset shall be regarded as transfer of the new asset on the date of such loan or advance.
Section 85(5) of Income Tax Act 2025
85(5) Where the investment in the new asset has been taken into account for sub-section (1), no deduction under section 123 for any tax year shall be allowed for such investment.
Section 85(6) of Income Tax Act 2025
85(6) In this section, “new asset” means any bond, redeemable after five years and as notified by the Central Government for the purposes of this section with such conditions (including a condition for providing a limit on the amount of investment by an assessee in such bond).
FAQs on Section 85 of Income Tax Act 2025
1. What is the purpose of Section 85(1) of the Income Tax Act, 2025?
Section 85(1) provides relief from charging long-term capital gains if the assessee invests the gains in specified bonds within six months from the date of transfer of land or building.
2. What type of assets must be transferred to avail the benefit under Section 85(1)?
The original asset must be land or building, or both.
3. Within what period must the investment in the new asset be made?
The investment must be made within six months from the date of transfer of the original asset.
4. What happens if the capital gains exceed the investment in the new asset?
The excess amount of capital gains over the investment will be charged under section 67.
5. What happens if the capital gains are equal to or less than the investment in the new asset?
The entire capital gains will not be charged under section 67.
6. Is there a limit on the amount of investment for claiming exemption under Section 85?
Yes, the investment in the new asset from the capital gains cannot exceed fifty lakh rupees.
7. Does the fifty lakh rupees limit apply for each original asset transferred?
No, the fifty lakh rupees limit applies during any tax year or collectively in the year of transfer and the subsequent tax year.
8. Can the capital gains from multiple original assets be invested together in a new asset under Section 85?
Yes, but the combined investment must not exceed fifty lakh rupees as per Section 85(2).
9. What is the consequence if the new asset is transferred within five years?
The capital gains not charged earlier will be deemed as long-term capital gains in the year of transfer or conversion.
10. What is meant by ‘conversion into money’ under Section 85(3)?
It refers to situations where the new asset is converted into cash or otherwise liquidated, not limited to a direct sale.
11. What if a loan or advance is taken against the new asset?
Taking a loan or advance against the security of the new asset is deemed as a transfer of the asset on the date of such loan or advance.
12. How does taking a loan against the bond affect the tax benefits claimed under Section 85?
It triggers taxation of previously exempted capital gains as long-term capital gains in the year of taking the loan.
13. Can the assessee also claim a deduction under Section 123 for the amount invested in the new asset?
No, if the investment is considered for exemption under Section 85(1), no deduction under Section 123 is allowed.
14. What is meant by “new asset” under Section 85?
The “new asset” refers to any bond notified by the Central Government that is redeemable after five years.
15. Can the Central Government impose conditions on the new asset?
Yes, including conditions on the amount of investment by an assessee.
16. Is it mandatory that the bond must be redeemable only after five years?
Yes, only bonds redeemable after five years are eligible for exemption under Section 85.
17. From which date is Section 85 applicable?
It is applicable w.e.f. 1st April, 2026.
18. Will partial investment of capital gains qualify for partial exemption under Section 85?
Yes, but only the portion of gains invested will get exemption; the balance will be taxable under Section 67.
19. Does the assessee need to invest the entire sale consideration or only the capital gains?
Only the capital gains amount needs to be invested, not the entire sale consideration.
20. Is investment in bonds of any company allowed for exemption under Section 85?
No, only bonds specifically notified by the Central Government for this purpose are eligible.
