Income Tax 2025

Appearance

Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house. ​

86(1) ​

If an individual or a Hindu undivided family has––

  • (a) capital gains arising from the transfer of any long-term capital asset, not being a residential house (original asset); and
  • (b) 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), then, the capital gains shall be dealt with as follows:— (i) if the net consideration is more than the cost of the new asset, so much of the capital gains as bears to the whole of the capital gains, the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 67; or (ii) if the net consideration is equal to or less than the cost of the new asset, no capital gains shall be charged under section 67.

86(2) ​

If the capital gains is not utilised by the assessee to purchase the new asset within one year before the transfer of the original asset, or is not utilised for the purchase or construction of a new asset before filing the return of income under section 263, then,––

  • (a) the unutilised amount shall be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government;
  • (b) such deposit shall be made not later than the due date applicable in the case of the assessee for filing the return of income under sub-section (1) of the said section; and
  • (c) the proof of deposit shall be submitted along with the return on or before the due date for filing the return

86(3) ​

For the purposes of sub-section (1), the amount already utilised for purchasing or constructing the new asset together with the deposited amount under sub-section (2) shall, subject to the sub-section (8), be deemed to be the cost of the new asset.

86(4) ​

If the amount deposited under sub-section (2) is not wholly or partly utilised for purchasing or constructing the new asset within the period specified in sub-section (1), then,––

  • (a) the amount determined as per with the following formula shall be charged under section 67 as income of the tax year in which three years from the date of the transfer of the original asset expires:–– X - Y, where,–– X = the capital gains not charged under section 67 as per sub-section (1). Y = the capital gains that would not have been charged under section 67, if the cost of the new asset had been taken to be the amount actually utilised for purchase or construction of the new asset;
  • (b) the assessee shall be entitled to withdraw the unused amount according to the said scheme.

86(5) ​

The provisions of sub-section (1) shall not apply, if––

  • (a) 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 residential house, other than the new asset, within two years of transfer of the original asset; or (iii) constructs any residential house, other than the new asset, within three years of transfer of the original asset; and
  • (b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.

86(6) ​

If the assessee purchases within two years of the transfer of the original asset, or constructs within three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset, the capital gains not charged under section 67 on the basis of cost of such new asset as per sub-section (1), shall be charged as long-term capital gains of the tax year in which such residential house is purchased or constructed.

86(7) ​

If the new asset is transferred within three years of its purchase or its construction, the capital gains not charged under section 67 on the basis of cost of such new asset as per sub-section (1) shall be charged as long-term capital gains of the tax year in which such new asset is transferred.

86(8) ​

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).

86(9) ​

If the net consideration on the transfer of original asset exceeds ten crore rupees, the amount exceeding ten crore rupees, shall not be taken into account for the purposes of sub-section (2).

86(10) ​

In this section, “net consideration” means the full value of the consideration received or accruing as a result of the transfer of the original asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer

Explanation

Section Summary: ​

This section provides relief from capital gains tax for individuals or Hindu Undivided Families (HUFs) who sell a long-term capital asset (other than a residential house) and reinvest the proceeds into purchasing or constructing a new residential house in India. The relief is conditional and depends on the timing of the investment and the amount reinvested. If the conditions are not met, the unutilized capital gains must be deposited in a specified bank or institution, and failure to comply may result in the capital gains being taxed.

Key Changes: ​

  1. Expanded Scope: The section now explicitly covers reinvestment in a residential house, whereas earlier provisions may have been more restrictive or ambiguous.
  2. Timeframe for Investment: The taxpayer must purchase the new residential house within one year before or two years after the sale of the original asset, or construct it within three years after the sale.
  3. Deposit Mechanism: If the capital gains are not fully utilized for the new asset, the unutilized amount must be deposited in a specified bank or institution as per government guidelines.
  4. Exclusion for High-Value Transactions: If the cost of the new asset or the net consideration from the sale exceeds ₹10 crore, the excess amount is excluded from the relief calculation.

Practical Implications: ​

  1. Taxpayers: Individuals and HUFs selling long-term capital assets (e.g., land, commercial property) can avoid capital gains tax by reinvesting the proceeds into a residential house, provided they meet the conditions.
  2. Compliance Burden: Taxpayers must ensure timely investment or deposit of unutilized capital gains and provide proof of compliance when filing returns.
  3. High-Value Transactions: Taxpayers dealing with high-value assets (above ₹10 crore) will not get relief on the excess amount, which may influence their investment decisions.
  4. Penalty for Non-Compliance: Failure to reinvest or deposit the capital gains within the specified timeframe will result in the capital gains being taxed.

Critical Concepts: ​

  1. Net Consideration: The sale proceeds of the original asset minus any expenses directly related to the sale (e.g., brokerage, legal fees).
  2. Long-Term Capital Asset: An asset held for more than 24 months (36 months for immovable property) before sale.
  3. Proportionate Relief: If the cost of the new asset is less than the net consideration, only a proportionate amount of capital gains is exempt.
    • Formula:
      [ \text{Exempt Capital Gains} = \left( \frac{\text{Cost of New Asset}}{\text{Net Consideration}} \right) \times \text{Total Capital Gains} ]
  4. Interaction with Other Laws: This section interacts with Section 67 (capital gains taxation) and Section 263 (filing of income tax returns).

Compliance Steps: ​

  1. Timing of Investment: Purchase the new residential house within one year before or two years after the sale of the original asset, or construct it within three years after the sale.
  2. Deposit Unutilized Gains: If the capital gains are not fully utilized, deposit the unutilized amount in a specified bank or institution before filing the income tax return.
  3. Documentation: Maintain proof of purchase/construction of the new asset and proof of deposit (if applicable) for filing with the tax return.
  4. Avoid Multiple Houses: Do not own more than one residential house (other than the new asset) at the time of sale, or acquire additional residential houses within the specified timeframe.

Examples: ​

  1. Full Reinvestment:

    • Mr. A sells a plot of land (long-term capital asset) for ₹2 crore (net consideration). He buys a new residential house for ₹2.5 crore within two years. Since the cost of the new asset exceeds the net consideration, no capital gains tax is charged.

  2. Partial Reinvestment:

    • Ms. B sells a commercial property for ₹1.5 crore (net consideration) and buys a residential house for ₹1 crore within two years. Only a proportionate amount of capital gains is exempt:
      [ \text{Exempt Capital Gains} = \left( \frac{1 \text{ crore}}{1.5 \text{ crore}} \right) \times \text{Total Capital Gains} ]
      The remaining capital gains will be taxed.

  3. Failure to Reinvest:

    • Mr. C sells a long-term asset for ₹3 crore but does not reinvest the proceeds or deposit the unutilized amount. The entire capital gains will be taxed under Section 67.

  4. High-Value Transaction:

    • Ms. D sells a property for ₹12 crore (net consideration) and buys a new house for ₹11 crore. Only ₹10 crore of the cost and net consideration are considered for relief. The excess ₹1 crore is excluded from the calculation.

This section encourages reinvestment in residential property while ensuring compliance through strict timelines and deposit requirements. Taxpayers must carefully plan their investments to maximize the tax benefits.