Section 85 of the Income-tax Act, 2025 exempts long-term capital gains on land or building where the gains are invested within six months in specified bonds redeemable after five years. The investment is capped at ₹50 lakh across the year of transfer and the following year.
What section 85 does
Section 85 is the capital gains bonds route — the successor to section 54EC of the Income-tax Act, 1961. Unlike section 82, it is available to any assessee, not only individuals and HUFs.
The scope is narrow but the mechanics are simple. The original asset must be land or building, or both, and the gains must be long-term. The investment must be made within six months of the transfer in a long-term specified asset.
The limit is the part most people get wrong. Sub-section (2) caps the investment at ₹50 lakh — and it does so on two bases at once: during any tax year, and across the year of transfer and the subsequent tax year taken together. Splitting an investment across two financial years does not double the relief.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 54EC(1) | Exemption on investment in specified bonds | 85(1) |
| 54EC(1), first proviso | ₹50 lakh cap in a financial year | 85(2)(a) |
| 54EC(1), second proviso | ₹50 lakh cap across two years | 85(2)(b) |
| 54EC(2) | Five-year lock-in and withdrawal of exemption | 85(3) |
| 54EC(2), Explanation | Loan on security treated as conversion | 85(4) |
| 54EC(3) | No section 80C deduction on the same investment | 85(5) |
| 54EC, Explanation (ba) | Definition of long-term specified asset | 85(6) |
Section 85 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the relief
Where an assessee has long-term capital gains from the transfer of land or building, or both, and within six months after the date of transfer invests the whole or part of the gains in a long-term specified asset, then: if the gains exceed the investment, only the excess is charged under section 67; if the gains are equal to or less than the investment, none of the gains is charged.
Sub-section (2) — the ₹50 lakh cap, on two bases
The investment made from capital gains arising from the transfer of one or more original assets shall not exceed ₹50 lakh — (a) during any tax year, and (b) in the year of transfer and the subsequent tax year taken together. Both limbs apply, which closes the old planning idea of investing ₹50 lakh before 31 March and another ₹50 lakh after.
Sub-section (3) — the five-year lock-in
If the new asset is transferred or converted (otherwise than by transfer) into money within five years of acquisition, the capital gains not charged under sub-section (1) are deemed to be long-term capital gains of the tax year in which the transfer or conversion happens. The exemption is clawed back in full.
Sub-section (4) — a loan against the bonds counts as conversion
Any loan or advance taken on the security of the new asset is deemed to have converted the asset into money on the date of that loan or advance. Pledging the bonds therefore triggers the same claw-back as selling them.
Sub-section (5) — no double benefit with section 123
Where the investment has been taken into account for sub-section (1), no deduction under section 123 — the successor to section 80C — is allowed for that investment in any tax year.
Sub-section (6) — what a 'long-term specified asset' is
Any bond redeemable after five years, issued on or after 1 April 2018 by the National Highways Authority of India under the NHAI Act, 1988, or by Rural Electrification Corporation Limited, or any other bond notified by the Central Government for this section.
Worked example
An assessee sells a commercial plot on 20 January 2027 with long-term capital gains of ₹90,00,000, and wants to use section 85.
| Attempted plan | Result under section 85 |
|---|---|
| Invest ₹50,00,000 in NHAI bonds on 10 March 2027 (tax year 2026-27) | Allowed — within six months and within the ₹50 lakh annual cap |
| Invest a further ₹40,00,000 in REC bonds on 5 July 2027 (tax year 2027-28), still within six months of the sale | Not allowed. Sub-section (2)(b) caps the total at ₹50 lakh across the year of transfer and the subsequent year |
| Exemption available | ₹50,00,000 |
| Chargeable under section 67 | ₹40,00,000 |
Suppose the assessee later pledges the NHAI bonds for a business loan in 2029. Under sub-section (4) that pledge is deemed a conversion into money, and because it is within five years, sub-section (3) brings the whole ₹50,00,000 back as long-term capital gains of that year. Note also that the same ₹50,00,000 cannot be claimed again under section 123.
Compliance checklist and due dates
- Invest within six months of the date of transfer — the window runs from the transfer, not from the end of the year.
- Treat ₹50 lakh as the total across the year of transfer and the following year, not per year.
- Confirm the bond is issued by NHAI or REC, or is otherwise notified, and is redeemable after five years.
- Do not sell, redeem or pledge the bonds for five years; a loan against them is treated as conversion under sub-section (4).
- Do not claim the same investment under section 123 — sub-section (5) bars it.
- Remember the relief is confined to land or building; gains on shares or other assets do not qualify.
Common mistakes
- Splitting ₹1 crore across two financial years expecting ₹1 crore of exemption. Sub-section (2)(b) prevents it.
- Counting six months from the end of the financial year rather than from the date of transfer.
- Taking a loan against the bonds within five years, which triggers the claw-back just as a sale would.
- Using section 85 for gains on shares, mutual funds or other assets — only land or building qualifies.
- Claiming the same bond investment under both section 85 and section 123.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.