Income Tax 2025

Appearance

Capital gains not to be charged on investment in certain bonds. ​

85(1) ​

Where an assessee has––

  • (a) long-term capital gains arising from the transfer of land or building, or both, (original asset); and
  • (b) 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), then, the capital gains shall be dealt with as follows:— (i) if the capital gains exceed the investment in the new asset, the amount of capital gains as exceeds such investment shall be charged under section 67; or (ii) if the capital gains is equal to or less than the investment in the new asset, the whole of such capital gains shall not be charged under section 67.

85(2) ​

For the purposes of sub-section (1), 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,––

  • (a) during any tax year; or
  • (b) in the year of transfer of the original asset or assets and in the subsequent tax year.

85(3) ​

If the new asset is transferred or converted (otherwise than by transfer) into money within five years of its acquisition, the capital gains not charged under section 67 as per sub-section (1), shall be deemed to be income chargeable as long-term capital gains in the tax year of its transfer or conversion.

85(4) ​

Any loan or advance taken on the security of the new asset shall be regarded as transfer of the new asset on the date of such loan or advance.

85(4) ​

Where the investment in the new asset has been taken into account for sub-section (1), no deduction under section 123 for any tax year shall be allowed for such investment.

85(4) ​

In this section, “new asset” means any bond, redeemable after five years and as notified by the Central Government for the purposes of this section with such conditions (including a condition for providing a limit on the amount of investment by an assessee in such bond).

Explanation

Section Summary: ​

Section 85 provides relief from capital gains tax when an individual or entity (assessee) reinvests long-term capital gains from the sale of land or building into specified long-term bonds. The purpose is to encourage investment in government-notified bonds by deferring or exempting capital gains tax, provided certain conditions are met.

Key Changes: ​

  1. Introduction of Long-Term Specified Asset: The section introduces the concept of "long-term specified asset," which refers to government-notified bonds redeemable after five years.
  2. Investment Limit: A cap of ₹50 lakh is introduced for investments in these bonds in a financial year or across the year of transfer and the subsequent year.
  3. Conditions for Exemption: The exemption is conditional on holding the new asset (bonds) for at least five years. If the bonds are sold, converted, or used as security for a loan within five years, the exemption is revoked, and the capital gains become taxable.
  4. No Double Benefit: Investments in these bonds cannot be claimed for deductions under Section 123 (e.g., deductions for specific savings or investments).

Practical Implications: ​

  1. Taxpayers Selling Property: Individuals or entities selling land or buildings can defer or avoid capital gains tax by reinvesting the gains in specified bonds within six months of the sale.
  2. Investment Limit Awareness: Taxpayers must ensure their investment in these bonds does not exceed ₹50 lakh in the relevant period.
  3. Holding Period: Taxpayers must hold the bonds for at least five years to retain the tax benefit. Premature sale, conversion, or using the bonds as loan security will trigger capital gains tax.
  4. No Additional Deductions: Taxpayers cannot claim deductions under Section 123 for the same investment in these bonds.

Critical Concepts: ​

  1. Long-Term Capital Gains (LTCG): Gains from the sale of land or building held for more than 24 months.
  2. Long-Term Specified Asset: Government-notified bonds redeemable after five years. These bonds are specifically designated for this purpose.
  3. Deemed Transfer: Using the bonds as security for a loan is treated as a transfer, revoking the tax exemption.
  4. Interaction with Section 67: Section 67 governs the taxation of capital gains. Section 85 modifies its application by providing exemptions under specific conditions.

Compliance Steps: ​

  1. Calculate Capital Gains: Determine the long-term capital gains from the sale of land or building.
  2. Invest in Specified Bonds: Reinvest the gains (or a portion) in government-notified bonds within six months of the sale.
  3. Maintain Records: Keep documentation of the sale, capital gains calculation, and bond investment.
  4. Monitor Holding Period: Ensure the bonds are held for at least five years to retain the tax benefit.
  5. Avoid Premature Transactions: Do not sell, convert, or use the bonds as loan security within five years.

Examples: ​

  1. Scenario 1: Mr. A sells a property for ₹1 crore, resulting in long-term capital gains of ₹30 lakh. He invests ₹25 lakh in specified bonds within six months. Since the investment (₹25 lakh) is less than the capital gains (₹30 lakh), ₹5 lakh will be taxed under Section 67, and ₹25 lakh will be exempt.

  2. Scenario 2: Ms. B sells a property and earns ₹40 lakh in capital gains. She invests ₹40 lakh in specified bonds. Since the investment equals the capital gains, the entire ₹40 lakh is exempt from tax.

  3. Scenario 3: Mr. C invests ₹50 lakh in specified bonds but uses them as collateral for a loan after three years. This is treated as a transfer, and the exempted capital gains become taxable in the year of the loan.

This section provides a strategic tax-saving opportunity for taxpayers selling property, but it requires careful adherence to investment limits and holding periods to avoid losing the benefit.