Section 85 — Capital gains not to be charged on investment in certain bonds. Successor to s.54EC of the 1961 Act.
Section 85 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) exempts long-term capital gains on the transfer of land or building, or both — the original asset — to the extent the assessee invests the gains within six months after the date of transfer in a long-term specified asset, the new asset. If the gains exceed the investment, only the excess is charged under section 67; if the gains equal or fall short of the investment, none of them is charged.
Sub-section (2) caps the investment that may be counted at fifty lakh rupees, and does so on two axes: during any tax year, and across the year of transfer of the original asset or assets and the subsequent tax year taken together. Sub-section (3) claws the relief back — if the new asset is transferred, or converted otherwise than by transfer into money, within five years of its acquisition, the gains not charged earlier are deemed to be long-term capital gains of the year of that transfer or conversion. Sub-section (4) treats taking any loan or advance on the security of the new asset as a conversion of it into money on the date of the loan or advance. Sub-section (5) bars a deduction under section 123 for any tax year in respect of an investment already counted here.
Sub-section (6) defines the long-term specified asset as any bond redeemable after five years, issued on or after 1 April 2018 by the National Highways Authority of India or the Rural Electrification Corporation Limited, or any other bond notified by the Central Government for the purposes of this section.
The section channels gains from land and buildings into long-dated infrastructure paper instead of taxing them, but only where the money genuinely stays there. The fifty lakh rupee cap keeps the relief small, and the five-year lock-in with the loan-or-advance rule in sub-section (4) stops the investor extracting the value while nominally holding the bond.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Window for investing the gains | Six months after the date of transfer | Investment of the whole or part of the capital gains in a long-term specified asset | Sub-section (1)(b) |
| Cap on the investment that may be counted | Fifty lakh rupees | Applies both during any tax year and across the year of transfer and the subsequent tax year taken together, for gains from one or more original assets | Sub-section (2) |
| Lock-in on the new asset | Five years from acquisition | Transfer or conversion into money within that period revives the gains as long-term capital gains of that year | Sub-section (3) |
| Redemption period of a qualifying bond | Redeemable after five years | Bond issued on or after 1 April 2018 by the National Highways Authority of India or the Rural Electrification Corporation Limited, or a bond notified by the Central Government | Sub-section (6) |
The fifty lakh rupee cap has two limbs and the second one is the one people miss: it is not merely a per-year cap but a cap across the year of transfer and the following year taken together, so splitting the investment over two years buys nothing. The relief is measured against what was invested, not against what was intended, and only investment made within six months after the transfer counts. Sub-section (4) is broader than sub-section (3) suggests — a loan or advance taken on the security of the bond is deemed to convert it into money that day, so pledging the bond within the five years triggers the same charge as selling it. And the same investment cannot do double duty: sub-section (5) blocks a section 123 deduction for any year in respect of it.
An individual sells a plot in May and realises a long-term capital gain of Rs. 80 lakh. In August, within six months, he invests Rs. 50 lakh in notified bonds redeemable after five years. Under sub-section (1)(i) the balance Rs. 30 lakh is charged under section 67; investing a further Rs. 30 lakh in the following tax year does not help, because sub-section (2)(b) caps the counted investment at fifty lakh rupees across the year of transfer and the subsequent year together. If in year four he pledges the bonds for a loan, sub-section (4) deems them converted into money and sub-section (3) brings the Rs. 50 lakh back as long-term capital gains of that year.
A taxpayer meets this section on the capital gains schedule of the return, where the exemption is claimed against a land or building sale, and again years later if the Assessing Officer reopens the year of a bond sale, redemption before time, or a loan taken against the bonds under sub-section (4).
within six months after the date of such transfer, invested whole or part of the capital gains in a long-term specified asset (new asset)
investment made in the long-term specified asset from capital gain arising from transfer of one or more original asset shall not exceed fifty lakh rupees
Any loan or advance taken on the security of the new asset shall be deemed to have converted the new asset into money on the date of such loan or advance.
See the full 1961 to 2025 concordance.
See the notifications index.
