Tax Planning:- Where to Invest Capital Gains

Selling a capital asset often results in a Income Tax liability. However, the Income Tax Act, 2025 provides several exemptions that allow taxpayers to reduce or even eliminate capital gains tax by investing gains or Net sale Consideration in specified assets within prescribed time limits.

This article explains where you can invest your capital gains, the conditions for claiming exemption and the important provisions that every taxpayer should know.

Section 82: – Capital gains on sale of Residential house property

(Corresponding provision under the Income Tax Act, 1961: Section 54)

Asset Transferred: Long term Residential House Property or lands appurtenant thereto

Assessee: Individual/HUF

Investment In: New Residential House Property

Time Period for investment:

->In case of Purchase- Within 1 year before or within 2 years from the date of transfer of Original Asset

->In case of construction: Within 3 years from the date of transfer of Original Asset

Quantum of Exemption: Lower of

• Capital gain
• Amount invested
• Rs. 10 crores

Lock in Period: 3 years. Otherwise, the long-term capital gain exempted earlier shall be reduced from the cost of acquisition of new asset.

Treatment of Unutilized amount: Deposit in Capital Gains Account Scheme (CAGS) before date of furnishing the return or before due date of filing the return, whichever is earlier.

• Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.
• Where the amount of capital gains does not exceed Rs. 2 cores, the assessee, may at his option, purchase/construct 2 residential houses in India. In other cases, he can only purchase 1 residential house property for claiming exemption under this section.

If during any tax year, the assessee has exercised the option to purchase or construct 2 residential houses in India, he shall not be subsequently entitled to exercise the option for the same tax year or any other tax year i.e. for future transfers of eligible residential houses you can still claim exemption u/s 82 but you can invest only in 1 residential house.

Section 83: – Capital gains on transfer of Agricultural Land

(Corresponding provision under the Income Tax Act, 1961: Section 54B)

Asset Transferred: Urban Agricultural Land

Assessee: Individual/HUF

Investment In: Agricultural Land (Urban or Rural)

Time Period for investment: Within 2 years from the date of transfer

Quantum of Exemption: Lower of

• Capital gain
• Amount invested

Lock in Period: 3 years. Otherwise, the long-term capital gain exempted earlier shall be reduced from the cost of acquisition of new asset.

Treatment of Unutilized amount: Deposit in Capital Gains Account Scheme (CAGS) before date of furnishing the return or before due date of filing the return, whichever is earlier.

• Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.
• Exemption u/s 83 shall be allowed only if urban agricultural land is used for agricultural purpose by Individual or HUF for at least 2 years before the date of transfer.
• As per Schedule III (Table: serial no. 18) of Income Tax Act, 2025 (Corresponding provision under the Income Tax Act, 1961: Sec. 10(37)) No capital gain shall arise on transfer of urban agricultural land if following conditions are satisfied: –
• Assessee is individual or HUF
• Urban agricultural land is compulsorily acquired by government
• land is used for agricultural purpose for at least 2 years before the date of transfer.

Section 84: – Capital gains on compulsory acquisition of lands and buildings of an industrial undertaking

(Corresponding provision under the Income Tax Act, 1961: Section 54D)

Asset Transferred: Land or building or any right in land or building forming part of an industrial undertaking belonging to assessee.

Assessee: Any assessee

Investment In: New Land or Building for Industrial Undertaking

Time Period for investment: 3 years from the date of transfer

Quantum of Exemption: Lower of

• Capital gain
• Amount invested

Lock in Period: 3 years. Otherwise, the long-term capital gain exempted earlier shall be reduced from the cost of acquisition of new asset.

Treatment of Unutilized amount: Deposit in Capital Gains Account Scheme (CAGS) before date of furnishing the return or before due date of filing the return, whichever is earlier.

• Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.
• The land and building should have been used by the assessee for the business of the industrial undertaking in the 2 years immediately preceding the date of transfer.
• Such exemption would be available even in respect of short-term capital asset, being land or building or any right in any land or building, provided such capital asset is used by assessee for the industrial undertaking belonging to him, even if he was not the owner for the said period of 2 years.

Section 85: – Capital gains not chargeable on investment in certain bonds

(Corresponding provision under the Income Tax Act, 1961: Section 54EC)

Asset Transferred: Long term Land or Building

Assessee: Any assessee

Investment In: Specified bonds issued by: –

• National Highways authority of India (NHAI)
• Rural Electrification Corporation Limited (RECL)
• Power Finance Corporation (PFC)
• Indian Railways Finance Corporation (IRFC)
• Housing and Urban Development Corporation Limited (HUDCO)
• Indian Renewable Energy Development Agency (IREDA)
  
  

Time Period for investment: Within 6 months from the date of transfer of Land or Building

Quantum of Exemption: Lower of

• Capital gain
• Amount invested
• Rs. 50 Lakhs

Lock in Period: 5 years. Otherwise, the long-term capital gain exempted earlier shall be taxable in the year in which the asset is sold or converted into money.

Treatment of Unutilized amount: Not applicable

Section 86: – Capital gains in case of investment in Residential House

(Corresponding provision under the Income Tax Act, 1961: Section 54F)

Asset Transferred: Any Long-term Capital Asset Except Residential House Property

Assessee: Individual/HUF

Investment In: New Residential House Property in India

Time Period for investment: In case of Purchase- Within 1 year before or within 2 years from the date of transfer, In case of construction: Within 3 years from the date of transfer

Quantum of Exemption: Lower of

• Long term capital gain
• LTCG * Amount invested in new residential house (Maximum Rs. 10 crore) / Net sales consideration

Lock in Period: 3 years. Otherwise, the long-term capital gain exempted earlier shall be taxable in the year in which the asset is sold.

Treatment of Unutilized amount: Deposit in Capital Gains Account Scheme (CAGS) before date of furnishing the return or before due date of filing the return, whichever is earlier.

• Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.
• Additional Conditions: –
• Assessee should not own more than 1 residential house on the date of transfer.
• Assessee should not purchase any other house within 2 years or construct within 3 years after the date of transfer of original asset.

Capital Gains Account Scheme (CGAS)

• If investment is not made before due date of filing of return, then to claim exemption one must can deposit the amount in CGAS if not invested for the specified purpose.
• Such deposit in CAGS should be made before filing return or before due date of filing return, whichever is earlier.
• If amount deposited is not utilized for specified purpose within stipulated period, then unutilized amount shall be taxed as capital gain the tax year in which specified period expires.
• If individual dies before stipulated period, unutilized amount is not taxable in the hands of legal hires of deceased individual.

Reviewed by:- CA (CPA) (CS) Mandeep Singh

(B.Com, M.Com F&T, CA (India), CPA (Ireland, Europe), Company Secretary)