Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area
[Section-87 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 87(1) of Income Tax Act 2025
87(1) If the assessee has––
- (a) capital gains arising from the transfer of capital asset, being machinery or plant or building or land or any rights in building or land used for the business of an industrial undertaking situated in an urban area, effected in the case of shifting of an industrial undertaking situated in an urban area (original asset) to any non-urban area (new area); and
- (b) within one year before or three years after the date of such transfer,—
- (i) purchased new machinery or plant for business of the industrial undertaking in the new area;
- (ii) acquired building or land or constructed building for his business in the said area;
- (iii) shifted the original asset and transferred its establishment to such area; and
- (iv) incurred expenses on such other purpose as specified in a scheme notified by the Central Government for this section,
then, instead of the capital gains being charged to income tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:—
- (A) if the cost and expenses incurred in on all or any of the purposes mentioned in clauses (i) to (iv) (new asset),––
- (I) is less than the capital gains, the difference shall be charged under section 67 as the income of the tax year; or
- (II) is equal to or more than the capital gain, no capital gain shall be charged under section 67;
- (B) for computing any capital gain arising from transfer of the new asset within three years of its being purchased, acquired, constructed or transferred, the cost shall be nil in case of clause (a) or shall be reduced by the amount of the capital gain in case of clause (b).
Section 87(2) of Income Tax Act 2025
87(2) If the capital gain is not used by the assessee for the new asset within one year before the transfer of the original asset, or before filing the return of income under section 263, then––
- (a) the unutilised amount shall be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government;
- (b) such deposit shall be made not later than the due date applicable in the case of the assessee for filing the return of income under sub-section (1) of the said section; and
- (c) the proof of deposit shall be submitted along with the return on or before the due date for filing the return.
Section 87(3) of Income Tax Act 2025
87(3) For the purposes of sub-section (1), the amount already utilised for purchasing or constructing the new asset together with the deposited amount under sub-section (2) shall be deemed to be the cost of the new asset.
Section 87(4) of Income Tax Act 2025
87(4) If the amount deposited under sub-section (2) is not wholly or partly utilised for the new asset within the period specified in sub-section (1), then,—
- (a) the unutilised amount shall be charged under section 67 as the income of the tax year in which the period of three years from the date of the transfer of the original asset expires; and
- (b) the assessee shall be entitled to withdraw the unused amount according to the said scheme.
Section 87(5) of Income Tax Act 2025
87(5) In this section, the expression “urban area” means any area within the limits of a municipal corporation or municipality, declared to be an urban area by the Central Government for the purposes of this section, having regard to––
- (a) the population;
- (b) concentration of industries; and
- (c) need for proper planning of the area and other relevant factors.
FAQs on Section 87 of Income Tax Act 2025
What is the objective of Section 87(1) of the Income Tax Act, 2025?
Section 87(1) provides exemption of capital gains arising from the transfer of assets when an industrial undertaking shifts from an urban area to a non-urban area.
Which types of assets qualify under Section 87(1)?
Qualifying assets include machinery, plant, building, land, or any rights in building or land used for the business of the industrial undertaking.
What conditions must be fulfilled to claim exemption under Section 87(1)?
The assessee must transfer assets as part of shifting the industrial undertaking to a non-urban area and invest in new assets within the prescribed timeframes.
What are the purposes for which the capital gains must be utilised to claim exemption?
The capital gains must be utilised for purchasing new machinery or plant, acquiring or constructing building or land in the new area, shifting the original asset and establishment, or incurring expenses as per a notified scheme.
What is the time limit for utilising capital gains under Section 87(1)?
Capital gains must be utilised within one year before or three years after the date of transfer of the original asset.
What happens if the cost of the new asset is less than the capital gain?
The difference between the capital gain and the cost incurred shall be charged to tax under section 67.
What happens if the cost of the new asset is equal to or more than the capital gain?
No capital gain shall be charged under section 67.
How is the cost of the new asset treated if it is transferred within three years?
If the new asset is transferred within three years, the cost shall be nil or reduced by the amount of capital gain exempted, depending on the case.
What is the provision if the capital gain is not utilised before filing the return of income?
The unutilised amount must be deposited in a specified bank or institution under a notified scheme.
By when must the deposit of unutilised capital gains be made?
The deposit must be made not later than the due date for filing the return of income under section 263(1).
What must be submitted along with the return of income if a deposit is made?
Proof of the deposit must be submitted along with the return on or before the due date.
How is the cost of the new asset determined if part of the capital gain is deposited?
The amount already utilised plus the amount deposited shall be deemed to be the cost of the new asset.
What happens if the deposited amount is not utilised within the specified period?
The unutilised amount will be charged as income under section 67 in the year when the three-year period from transfer expires.
Can the unused deposit be withdrawn if not utilised?
Yes, the assessee shall be entitled to withdraw the unused amount as per the notified scheme.
What does the expression “urban area” mean under Section 87(5)?
It refers to areas within the limits of a municipal corporation or municipality declared as urban areas by the Central Government for this section.
On what basis will an area be declared as an urban area under this section?
The basis includes population, concentration of industries, need for proper planning, and other relevant factors.
What is the effective date of Section 87 of the Income Tax Act, 2025?
Section 87 is effective from 1st April, 2026.
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