Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 88(1) of Income Tax Act 2025
88(1) Irrespective of anything contained in section 87 if the assessee has––
- (a) capital gains arising from the transfer of a 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 course of or in consequence of shifting of such industrial undertaking (original asset) to any Special Economic Zone in any area; and
- (b) has within one year before or three years after the date of such transfer,—
- (i) purchased machinery or plant for the business of the industrial undertaking in such Special Economic Zone;
- (ii) acquired building or land or constructed building for his business in such Special Economic Zone;
- (iii) shifted the original asset and transferred the establishment to such Special Economic Zone; and
- (iv) incurred expenses on such other purposes specified by a scheme notified by the Central Government in this behalf,
then, instead of capital gain 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 gains, 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 88(2) of Income Tax Act 2025
88(2) If the capital gain is not utilised 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 not later than the due date for filing the return of income under sub-section (1) of the said section 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 the said sub-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 88(3) of Income Tax Act 2025
88(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 88(4) of Income Tax Act 2025
88(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 88(5) of Income Tax Act 2025
88(5) In this section “urban area” shall have the meaning assigned to it in section 87.
FAQs on Section 88 of Income Tax Act 2025
What is the benefit under Section 88(1) of the Income Tax Act, 2025?
If an assessee shifts an industrial undertaking from an urban area to a Special Economic Zone and fulfils specified conditions, the capital gains from transfer of certain assets will not be immediately taxed.
Which assets are covered under Section 88(1)?
Machinery, plant, building, land, or rights in building or land used for the business of an industrial undertaking in an urban area.
What are the conditions to claim exemption under Section 88(1)?
The assessee must purchase new machinery/plant, acquire or construct buildings/land, shift original assets, or incur expenses specified by a government-notified scheme within a specified time frame.
What is the specified time frame for investment under Section 88(1)?
Within one year before or three years after the date of transfer of the original asset.
What happens if the investment is less than the capital gain?
The difference between the capital gain and the amount invested will be taxed as income under section 67.
What happens if the investment is equal to or more than the capital gain?
No capital gain will be taxed under section 67.
What is the treatment if the new asset is transferred within three years?
For machinery or plant, the cost is taken as nil; for other assets, the cost is reduced by the exempted capital gain while computing future capital gains.
What if the capital gain amount is not utilised immediately?
The unutilised amount must be deposited in a specified bank or institution under a government-notified scheme before the due date for filing the return of income.
Where must the unutilised capital gain amount be deposited?
It must be deposited in a specified bank or institution as per a scheme notified by the Central Government.
When must the deposit be made for unutilised capital gains?
Not later than the due date for filing the return of income under section 263(1).
Is submission of proof of deposit mandatory?
Yes, proof of deposit must be submitted along with the return on or before the due date for filing the return.
How is the cost of the new asset determined when part of the capital gain is deposited?
The amount already utilised plus the amount deposited is deemed to be the cost of the new asset.
What happens if the deposit amount is not utilised within the specified period?
The unutilised deposit will be taxed as income under section 67 in the tax year when the three-year period from the original transfer expires.
Can the assessee withdraw the unused deposit amount?
Yes, after it is taxed as income under section 67, the assessee can withdraw the unused amount according to the scheme.
What is the meaning of ‘urban area’ for the purpose of Section 88?
The term “urban area” is defined as per section 87 of the Income Tax Act, 2025.
Is Section 88 applicable even if Section 87 suggests otherwise?
Yes, Section 88 applies notwithstanding anything contained in section 87.
Are expenses other than asset purchases eligible for exemption?
Yes, expenses incurred on purposes specified by a government-notified scheme are also eligible.
What if only part of the capital gains is utilised for eligible purposes?
Only the unutilised portion will be taxed under section 67.
Is shifting of only part of the industrial undertaking sufficient?
The provision requires the shifting of the industrial undertaking along with the transfer of assets to the Special Economic Zone.
Does the exemption apply if the new asset is acquired before transfer of the original asset?
Yes, acquisition within one year before the date of transfer also qualifies.
Does the exemption apply to any Special Economic Zone?
Yes, the Special Economic Zone can be located in any area.
Is there a separate scheme notified for deposit under Section 88(2)?
Yes, a specific scheme will be notified by the Central Government for such deposits.
What is the consequence of not depositing the unutilised capital gains?
The benefit of exemption will not be available, and capital gains may become taxable.
Is interest earned on the deposit account taxable?
The Act does not specify; it will depend on the terms of the scheme notified by the Central Government.
Can the assessee claim deduction for expenses incurred on shifting?
Only if the expenses are covered under the government-notified scheme as eligible purposes.
