Section 86 — Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house. Successor to s.54F of the 1961 Act.
Section 86 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) relieves an individual or Hindu undivided family from the capital gains charge on the transfer of a long-term capital asset that is not a residential house (the original asset), where within one year before or two years after the date of transfer he purchases, or within three years after it constructs, one residential house in India (the new asset). If the net consideration exceeds the cost of the new asset, the exempt part of the gain bears the same proportion to the whole gain as that cost bears to the net consideration; if the net consideration is equal to or less than the cost, no capital gains is charged under section 67.
Sub-section (2) covers money not yet spent: net consideration not utilised within one year before the transfer, or not utilised for purchase or construction before the return under section 263 is filed, must be deposited in a specified bank or institution and used as per the scheme notified by the Central Government, the deposit being made before filing the return and not later than the section 263 due date, with proof submitted along with the return. Sub-section (3) treats the amount utilised together with the deposit as the cost of the new asset, subject to sub-section (8).
Sub-section (4) withdraws relief on unused deposits: where the deposit is not wholly or partly utilised within the period in sub-section (1), X minus Y is charged under section 67 as income of the tax year in which three years from the date of transfer expires — X being the gain not charged under sub-section (1) and Y the gain that would not have been charged had the cost of the new asset been the amount actually utilised.
Sub-sections (5) to (7) disqualify and claw back. Sub-section (1) does not apply where the assessee owns more than one residential house other than the new asset on the date of transfer, or purchases another within one year, or constructs another within three years, and the income from such house (other than the one owned on the date of transfer) is chargeable under "Income from house property". Sub-section (6) charges the exempted gain as long-term capital gains of the year in which another such residential house is purchased within two years or constructed within three years after the transfer; sub-section (7) does the same where the new asset itself is transferred within three years of its purchase or construction.
Sub-sections (8) and (9) impose the ten crore rupee ceilings — cost of the new asset above ten crore rupees is left out of account for sub-section (1), and net consideration above ten crore rupees for sub-section (2). Sub-section (10) defines net consideration as the full value of the consideration on the transfer reduced by expenditure incurred wholly and exclusively in connection with it.
The relief is for a taxpayer who converts a long-term investment into a home, so it is measured against the whole net consideration rather than the gain — the entire sale proceeds must go into the house to escape the charge completely. The disqualification and clawback rules keep the concession for people acquiring a house to live in rather than adding to a portfolio, and the ten crore ceilings cap what an expensive house can shelter.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Window for purchasing the new residential house | One year before, or two years after, the date of transfer | Purchase of one residential house in India | Sub-section (1)(b) |
| Window for constructing the new residential house | Three years after the date of transfer | Construction of one residential house in India | Sub-section (1)(b) |
| Exempt proportion where net consideration exceeds cost of the new asset | Capital gains × cost of the new asset ÷ net consideration | Only where the net consideration is more than the cost of the new asset | Sub-section (1)(i) |
| Full exemption | No capital gains charged under section 67 | Where the net consideration is equal to or less than the cost of the new asset | Sub-section (1)(ii) |
| Outer date for depositing unutilised net consideration | Before filing the return and not later than the section 263 due date | Applies to net consideration not utilised for purchase or construction before the return is filed | Sub-section (2)(b) |
| Year in which unutilised deposit is charged | The tax year in which three years from the date of transfer of the original asset expires | Where the deposited amount is not wholly or partly utilised within the period specified in sub-section (1) | Sub-section (4)(a) |
| Ownership disqualification on the date of transfer | More than one residential house other than the new asset | Read with clause (b) — the income from such house, other than the one house owned on the date of transfer, must be chargeable under "Income from house property" | Sub-section (5)(a)(i) |
| Clawback where another residential house is acquired | Within two years after the transfer if purchased, or three years if constructed | Where the income from that other house is chargeable under "Income from house property"; the exempted gain is charged as long-term capital gains of that year | Sub-section (6) |
| Lock-in on the new asset | Three years from the date of its purchase or construction | Transfer within that period charges the exempted gain as long-term capital gains of the year of transfer | Sub-section (7) |
| Ceiling on the cost of the new asset | Ten crore rupees | Any excess over ten crore rupees is not taken into account for sub-section (1) | Sub-section (8) |
| Ceiling on net consideration for the deposit rule | Ten crore rupees | Any excess over ten crore rupees is not taken into account for sub-section (2) | Sub-section (9) |
The comparison in sub-section (1) is between the cost of the new asset and the net consideration, not the gain, so putting only the gain into the house leaves part of it chargeable. The two ten crore ceilings operate by ignoring the excess rather than denying relief, and they bite at different points — sub-section (8) on the cost side, sub-section (9) on the net consideration side. Sub-section (5) is a two-limb test: owning other houses is not fatal unless the income from them is chargeable under "Income from house property". Where the deposit stays unspent, the charge arises in the tax year in which three years from the transfer expire.
An individual transfers long-term unlisted shares for a net consideration of Rs. 4 crore, realising a gain of Rs. 3 crore, and buys one residential house in India for Rs. 3 crore within two years. Because the net consideration exceeds the cost of the new asset, sub-section (1)(i) exempts Rs. 3 crore × 3 ÷ 4, that is Rs. 2.25 crore, and Rs. 75 lakh remains chargeable under section 67. If he sells that house two years later, sub-section (7) charges the Rs. 2.25 crore as long-term capital gains of the year of sale.
You claim it in the return for the tax year of transfer, with proof of any deposit submitted along with that return. You meet it again as an addition in the year three years from the transfer expire where the deposit was never spent, or in the year a second house is bought or the new house sold.
within one year before, or two years after, the date of such transfer, purchased, or has within three years after that date constructed, one residential house in India (new asset)
If the cost of the new asset exceeds ten crore rupees, the amount exceeding ten crore rupees, shall not be taken into account for the purposes of sub-section (1)
See the full 1961 to 2025 concordance.
See the circulars index.
