Sections 87 explained: this guide covers what it 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.
Sections 87 and 88 let an industrial undertaking shift out of an urban area, or into a Special Economic Zone, without paying tax on the capital gain from selling its old machinery, plant, building or land, to the extent the money goes into the new set-up. Section 89 extends the time limits of sections 82 to 86 where the compensation for a compulsory acquisition arrives late. This article reads the three sections as per the Income-tax Act, 2025 as amended by the Finance Act, 2026; later amendments, rules and notifications should be checked. For capital gains computations, see our capital gains calculation service.
If an industrial undertaking in an urban area shifts, the capital gain on the old assets is not charged under section 67 to the extent the cost and expenses on the new asset equal or exceed it (section 87). Section 88 gives the same treatment when the shift is to a Special Economic Zone, irrespective of section 87. Unused gain must be deposited under a notified scheme before the return is filed. Section 89 reckons the time under sections 82 to 86 from the date compensation is received for a compulsory acquisition.
Section 87: shifting from an urban area
Conditions
Section 87(1) applies if the assessee has:
- (a) capital gains from the transfer of 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 that undertaking to any area other than an urban area (the "new area"); and
- (b) within one year before or three years after the date of transfer: purchased new machinery or plant for the business of the undertaking in the new area; acquired building or land or constructed a building for his business in that area; shifted the original asset and transferred the establishment of the undertaking to that area; and incurred expenses on such other purposes as specified in a scheme notified by the Central Government for this section.
The sub-clauses (i) to (iv) are printed with "and" between them, but clause (A) below speaks of cost and expenses "on all or any of the purposes" in (i) to (iv); the printed words are quoted here and are not reconciled.
The result
| Case | Treatment |
|---|---|
| (A)(I) Cost and expenses on the "new asset" (all or any of the four purposes) are less than the capital gains | The difference is charged under section 67 as income of the tax year |
| (A)(II) Cost and expenses are equal to or more than the capital gains | No capital gain is charged under section 67 |
| (B) For capital gain on transfer of the new asset within three years of its being purchased, acquired, constructed or transferred | The cost is nil in case (A)(II), or reduced by the amount of the capital gain in case (A)(I) |
Example (invented). Aranya Castings shifts its factory from an urban area to a non-urban area. The capital gain on the old plant and land is Rs. 30,00,000. Within the permitted period it spends Rs. 18,00,000 on new plant and building in the new area. Cost and expenses (Rs. 18,00,000) are less than the gain (Rs. 30,00,000), so under (A)(I) the difference, Rs. 30,00,000 – Rs. 18,00,000 = Rs. 12,00,000, is charged under section 67 for that tax year. Had the expenditure been Rs. 30,00,000 or more, nothing would be charged under (A)(II).
Deposit and failure to utilise: section 87(2) to (4)
If the capital gain is not used 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 must be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government; (b) the deposit must be made before filing the return and not later than the due date for filing under section 263(1); and (c) proof of deposit must accompany the return. The amount already utilised plus the deposit is deemed to be the cost of the new asset. If the deposit is not wholly or partly utilised for the new asset within the period in sub-section (1), the unutilised amount is charged under section 67 as income of the tax year in which three years from the date of transfer of the original asset expire, and the assessee may withdraw it under the scheme.
"Urban area": section 87(5)
"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 the population, the concentration of industries, and the need for proper planning of the area and other relevant factors. Which areas have been declared is not in the text consulted.
Section 88: shifting to a Special Economic Zone
Section 88(1) applies "irrespective of anything contained in section 87". The conditions are:
- (a) capital gains from the transfer of machinery or plant or building or land or 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 the undertaking to any Special Economic Zone in any urban or other area; and
- (b) within one year before or three years after the transfer, the same four steps as in section 87 but in relation to the Special Economic Zone (purchase of machinery or plant, acquisition of building or land or construction of a building, shifting the original asset and transferring the establishment, and expenses on purposes specified in a notified scheme).
The treatment is the same as in section 87: case (A)(I) charges the difference under section 67; case (A)(II) charges nothing; and (B) sets the cost of the new asset to nil or reduces it by the capital gain for a transfer within three years. The deposit rule (section 88(2)), deemed cost (3) and failure to utilise within three years (4) mirror section 87, and "urban area" has the meaning in section 87 (sub-section (5)). The Special Economic Zone itself is not defined in sections 87 to 89. The text of section 88(1)(A) carries small printing slips ("incurred in on all or any of the purposes mentioned sub-clauses") that do not alter the sense.
Section 89: extension of time for acquiring the new asset or depositing
Irrespective of sections 82, 83, 84, 85 and 86:
- (a) if the transfer of the original asset mentioned in those sections is by way of compulsory acquisition under any law; and
- (b) if the compensation awarded is not received by the assessee on the date of transfer,
then the period available to him under those sections for acquiring the new asset, or for investing or depositing the capital gain in a specified bank or institution, is reckoned from the date of receipt of the compensation.
Section 89 does not name sections 87 and 88. The Act as printed covers the five sections listed, and the reader should not assume a wider scope.
Example (invented). Govind's land is compulsorily acquired and the transfer takes place on a certain date, but the compensation is awarded and received eighteen months later. If section 83 applies to him as an individual with agricultural land, the two-year period to buy the new agricultural land is reckoned from the date of receipt, not from the date of transfer. For section 83 see our article on sections 83 and 84; for the residential house relief see the live note on section 86.
For cost of acquisition rules see section 90. To see where the earlier Act's provisions sit, see our capital gains sections mapping.
Need help with capital gains on shifting an undertaking?
The relief turns on dates, on the type of new area, and on documenting the deposit before the return. Our capital gains calculation team can help you check each step against sections 87 to 89.
Key takeaways
- Section 87 covers shifting from an urban area to a non-urban area; section 88 covers shifting to a Special Economic Zone.
- The window is one year before to three years after the transfer.
- Gain not used by the filing of the return must be deposited under the notified scheme before the return, not later than the due date in section 263(1).
- An unused deposit is charged in the year three years from the transfer expire.
- Section 89 starts the clock from receipt of compensation where the transfer is a compulsory acquisition under sections 82 to 86.
Read next
- Sections 83–84: agricultural land and compulsory acquisition
- Sections 94–95: amounts not deductible and profits chargeable to tax
- Section 86: exemption on investment in residential house
- Section 90: cost of acquisition
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.