Section 86 of the Income-tax Act, 2025 exempts long-term capital gains on any asset other than a residential house where the net consideration is reinvested in one residential house in India. The exemption is proportionate to the net consideration invested and is denied if the assessee owns more than one other house.
What section 86 does
Section 86 is the counterpart to section 82 — the successor to section 54F of the Income-tax Act, 1961. It applies where the asset sold is not a residential house: shares, gold, land, or anything else that is a long-term capital asset.
The crucial structural difference from section 82 is the base. Section 82 tests reinvestment against the capital gains; section 86 tests it against the net consideration — the whole sale proceeds less transfer expenditure. If you reinvest only part of the net consideration, you get only a proportionate exemption.
The condition that most often defeats a claim is in sub-section (5): the exemption is unavailable if the assessee owns more than one residential house other than the new asset on the date of transfer, or buys or constructs another house within the specified periods, where that house's income is chargeable under the house property head.
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 |
|---|---|---|
| 54F(1) | Proportionate exemption on reinvestment in a house | 86(1) |
| 54F(4) | Capital Gains Account Scheme deposit | 86(2) and 86(4) |
| 54F(1), proviso | Restriction where more than one other house is owned | 86(5) |
| 54F(2) | Withdrawal on purchase or construction of another house | 86(6) |
| 54F(3) | Withdrawal on transfer of the new asset within three years | 86(7) |
| 54F(1), fourth proviso | ₹10 crore cap | 86(8) and 86(9) |
| 54 | Exemption where the asset sold is a residential house | 82 |
Section 86 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) — proportionate relief on net consideration
An individual or HUF with long-term capital gains on any asset other than a residential house who purchases one residential house in India within one year before or two years after, or constructs one within three years after, gets relief. If the net consideration exceeds the cost of the new asset, the exempt portion is: capital gains × (cost of new asset ÷ net consideration). If the net consideration is equal to or less than the cost, the whole gain is exempt.
Sub-section (2) — the deposit requirement
Where the net consideration is not utilised before filing the return under section 263, the unutilised amount must be deposited under the notified scheme before filing the return and not later than the section 263 due date, with proof submitted along with the return. Note that it is the net consideration, not merely the gains, that has to be accounted for.
Sub-sections (3) and (4) — deemed cost and the claw-back formula
The amount utilised plus the amount deposited is deemed to be the cost of the new asset, subject to sub-section (8). If the deposit is not wholly or partly utilised within the period, the amount charged under section 67 in the year the three-year period expires is X − Y, where X is the capital gains not charged under sub-section (1), and Y is the gains that would not have been charged had the cost of the new asset been taken as the amount actually utilised.
Sub-section (5) — the one-house condition
Sub-section (1) does not apply if the assessee (i) owns more than one residential house other than the new asset on the date of transfer of the original asset, or (ii) purchases any other residential house within one year of the transfer, or (iii) constructs any other residential house within three years — and the income from such house, other than the one owned on the date of transfer, is chargeable under the head Income from house property.
Sub-section (6) — buying another house later withdraws the exemption
If the assessee purchases within two years after the transfer, or constructs within three years, any residential house other than the new asset whose income is chargeable under the house property head, the exempted gains are charged as long-term capital gains of the year that house is purchased or constructed.
Sub-section (7) — selling the new house within three years
If the new asset is transferred within three years of its purchase or construction, the gains not charged under sub-section (1) are charged as long-term capital gains of the tax year in which the new asset is transferred.
Sub-sections (8) to (10) — the ₹10 crore caps and 'net consideration'
Cost of the new asset above ₹10 crore is ignored for sub-section (1), and net consideration above ₹10 crore is ignored for sub-section (2). Net consideration means the full value of consideration received or accruing on transfer of the original asset, reduced by expenditure incurred wholly and exclusively in connection with the transfer.
Worked example
An individual sells listed shares held for eight years in tax year 2026-27 and buys a flat.
| Step | Working | Amount |
|---|---|---|
| Sale consideration | — | ₹2,00,00,000 |
| Less: transfer expenditure | Brokerage | (₹2,00,000) |
| Net consideration | Section 86(10) | ₹1,98,00,000 |
| Long-term capital gains | After cost of acquisition | ₹1,20,00,000 |
| Cost of the new residential house | Purchased within two years | ₹1,32,00,000 |
| Exempt gains | ₹1,20,00,000 × (₹1,32,00,000 ÷ ₹1,98,00,000) | ₹80,00,000 |
| Chargeable under section 67 | ₹1,20,00,000 − ₹80,00,000 | ₹40,00,000 |
This is the difference from section 82 in one line: reinvesting ₹1,32,00,000 — more than the entire ₹1,20,00,000 gain — still leaves ₹40,00,000 taxable, because the test is the proportion of net consideration reinvested, not of the gain.
The claim also fails entirely if, on the date of sale, the taxpayer already owned more than one other residential house whose income is taxable under the house property head — sub-section (5).
Compliance checklist and due dates
- Reinvest the whole net consideration, not just the gains, to get a full exemption.
- Count the residential houses you own on the date of transfer; more than one other house defeats the claim under sub-section (5).
- Do not buy another house within two years or construct one within three years — sub-section (6) withdraws the exemption.
- Hold the new house for at least three years; sub-section (7) claws back the exemption otherwise.
- Deposit any unutilised net consideration under the scheme before filing the return and by the section 263 due date.
- Apply the ₹10 crore ceilings in sub-sections (8) and (9).
- If the asset sold is a residential house, use section 82, not section 86.
Common mistakes
- Reinvesting only the capital gains and expecting a full exemption. The base is net consideration.
- Ignoring houses already owned. Sub-section (5) is a complete bar, not a proportionate reduction.
- Buying a second house soon after, which withdraws the exemption under sub-section (6).
- Selling the new house within three years.
- Computing net consideration without deducting transfer expenditure, or after deducting the cost of acquisition — sub-section (10) deducts only transfer expenditure.
- Using section 86 when the asset sold was a residential house; that is section 82.
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.