Capital Gains Exemption Under explained: this guide covers what Capital Gains Exemption Under means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
1. Overview: Capital Gains Exemptions on Property
The Income Tax Act, 2025 provides significant capital gains exemptions for taxpayers who reinvest their long-term capital gains into residential property or specified bonds. These exemptions — under Sections 82, 86, and 85 — can potentially reduce or eliminate the capital gains tax liability on property sales. Understanding each provision is essential for effective property sale planning.
2. Section 82: Reinvestment from One Residential Property into Another
Applicable when: Long-term capital gains arise from sale of a residential house property.
- Purchase a new residential property 1 year before OR 2 years after the sale date
- OR construct a new residential property within 3 years of sale
- Exemption = lower of LTCG amount or cost of new property
- Maximum exemption: Rs 10 crore (cap introduced from AY 2024-25)
- New property cannot be sold within 3 years of purchase/construction
- Available for one residential property — cannot buy/construct multiple to claim multiple exemptions
3. Section 86: Reinvestment from ANY Long-Term Asset into Residential Property
Applicable when: LTCG arises from ANY long-term capital asset EXCEPT residential property (for which Section 82 applies). So it covers equity shares, commercial property, gold, mutual funds, etc.
- Net sale consideration (not just gains) must be invested in one residential house property
- If only part of net consideration invested: proportionate exemption
- Taxpayer must not own more than one residential house property on the date of sale (other than the new one)
- Construction: within 3 years; purchase: 1 year before or 2 years after sale
- Rs 10 crore cap applies here too
4. Section 85: Investment in Capital Gains Bonds
Long-term capital gains from land and building (not equity shares) can be invested in specified capital gains bonds within 6 months of sale:
- Issuer: NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation)
- Lock-in period: 5 years (increased from 3 years by Finance Act 2018)
- Maximum investment: Rs 50 lakh per Tax Year
- Bonds carry a fixed interest rate (~5.25%) which is fully taxable as income
- No Rs 10 crore cap — but capped at Rs 50L investment per year
5. Comparison Table
| Feature | Section 82 | Section 86 | Section 85 |
|---|---|---|---|
| Source of CG | Residential property | Any asset except residential property | Land and building |
| Invest in | Residential property | Residential property | NHAI/REC bonds |
| Time to invest | 1 yr before / 2 yr after | 1 yr before / 2 yr after | 6 months |
| Amount exempt | CG or cost (lower); max Rs 10 crore | Proportionate to reinvested amount; max Rs 10 crore | Investment amount; max Rs 50L |
| Lock-in | 3 years | 3 years | 5 years |
6. Capital Gains Account Scheme
If the new property has not been purchased/constructed before the ITR due date, the unutilised capital gains must be deposited in the Capital Gains Account Scheme (CGAS) in a specified bank before the ITR due date. The amount is then used for property purchase/construction. If not utilised within the specified period, it becomes taxable as capital gains in the year the deadline lapses.
7. Why TaxClue
Capital gains exemptions on property transactions require precise timing, documentation, and compliance. TaxClue advises on the optimal exemption route and ensures CGAS compliance where needed. Contact us for property capital gains planning under ITA 2025.