Section 85 · Computation of total income
Section 85 of the Income-tax Act, 2025 — Capital Gains Exemption on Investment in Certain Bonds (old Section 54EC)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter IV
📜 What the law says — Section 85, Income-tax Act 2025
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 are equal to or less than the investment in the new
asset, the whole of such capital gains shall not be charged under section
67.
(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.
(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.
(4) 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.
(5) Where the investment in the new asset has been taken into account for sub-sec-
tion (1), no deduction under section 123 for any tax year shall be allowed for such
investment.
(6) For the purposes of sub-section (1), “long-term specified asset” means any bond,
redeemable after five years and issued on after the 1st April 2018, by the National
Highways Authority of India constituted under section 3 of the National Highways
Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corpora-
tion Limited, a company formed and registered under the Companies Act, 2013 (18
of 2013) or any other bond as may be notified by the Central Government for the
purposes of this section.
Capital gains on transfer of certain capital assets not to be charged in case of
investment in residential house.
In plain language
What Section 85 means in plain English
When you sell land or a building and make a long-term capital gain (LTCG), you would normally pay tax on that gain. Section 85 of the Income-tax Act, 2025 (effective from 1 April 2026, replacing the old Section 54EC of the Income-tax Act, 1961) lets you save that tax if you re-invest the gain into certain government-backed capital-gain bonds within a fixed window. In short: park your gain in the specified bonds, hold them for 5 years, and the gain that would have been taxed is exempt.
Who can use it
- Any category of taxpayer — individuals, HUFs, firms, LLPs, companies, NRIs. There is no restriction on the type of assessee.
- The gain must be a long-term capital gain arising specifically from the transfer of land or building or both. Gains from shares, mutual funds, gold or other assets do not qualify.
- The asset must be long-term — for immovable property, held for more than 24 months.
Key conditions and limits
- 6-month window: You must invest in the specified bonds within six months from the date of transfer (sale) of the land/building.
- ₹50 lakh cap: The maximum you can invest and claim exemption on is ₹50 lakh. This ceiling applies across the year of transfer and the immediately following year taken together — you cannot split ₹50 lakh in each year to get ₹1 crore.
- Eligible bonds ("long-term specified asset"): Bonds redeemable after 5 years, issued after 1 April 2018 by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC/RECL), or any other bond notified by the Central Government (in practice PFC, IRFC and similar notified issuers).
- 5-year lock-in: The bonds must be held for at least 5 years. If you transfer them, or convert them into money, or take a loan/advance against them within 5 years, the earlier-exempted gain becomes taxable as LTCG in the year of that event.
An important change from old 54EC
The 2025 Act tightens the language from "long-term capital asset" to "long-term capital gain." The practical effect: gains on depreciable assets that are treated as short-term under Section 41 (old Section 50) do not qualify, even if the building was held long. The core benefit — exemption for genuine LTCG on land/building — is unchanged.
How it interacts with other sections
- Works alongside Section 82 (old 54) and Section 84 (old 54F) — you can use 85 for the bond route while using 82/84 for the house route, as long as the same gain is not double-counted.
- No double deduction: The amount invested in these bonds cannot also be claimed as a deduction under Section 123 (the Chapter VI-A deductions).
Practical implications
- Interest on these bonds (around 5-5.25% p.a., issuer-dependent) is taxable as "income from other sources." The benefit is the capital-gains saving, not high interest.
- Because of the ₹50 lakh cap, on large property sales you may need to combine Section 85 with a house purchase under Section 82/84 to shelter the full gain.
- Plan around the 6-month deadline — bond issues sometimes close, so apply early.
💡 Example
Example 1 — Gain fully covered. Mr. Rao sells a plot in June 2026 for ₹1.2 crore. After indexed cost of ₹90 lakh, his LTCG is ₹30 lakh. In September 2026 (within 6 months) he invests the full ₹30 lakh in REC bonds. Since ₹30 lakh is below the ₹50 lakh cap and covers the entire gain, his whole ₹30 lakh gain is exempt. He holds the bonds till 2031; no tax arises.
Example 2 — Gain larger than the cap. Mrs. Sharma sells a building and earns an LTCG of ₹80 lakh. She can invest a maximum of ₹50 lakh in NHAI bonds. That ₹50 lakh is exempt; the balance ₹30 lakh is taxed as LTCG (12.5% under the current regime, roughly ₹3.75 lakh plus cess). She cannot invest another ₹50 lakh next year to shelter the balance, because the cap spans both years.
A relatable story. Retiring schoolteacher Kamala sold her ancestral house and worried about a big tax bill on her ₹45 lakh gain. Her CA told her about Section 85. She invested ₹45 lakh in REC capital-gain bonds within four months, saved the LTCG tax entirely, and now earns modest annual interest — but she noted the trap: her son asked to pledge the bonds for a loan in year three. Her CA warned that a loan against the bonds counts as "converting them into money," which would have made the whole ₹45 lakh taxable. She waited out the 5-year lock-in instead.
| Feature | Section 85 (IT Act 2025) | Old Section 54EC (IT Act 1961) |
|---|
| Eligible source asset | Land or building or both (long-term) | Land or building or both (long-term) |
| Basis of exemption | Long-term capital gain | Long-term capital asset |
| Investment window | Within 6 months of transfer | Within 6 months of transfer |
| Maximum investment | ₹50 lakh (across year of transfer + next year) | ₹50 lakh (across year of transfer + next year) |
| Eligible bonds | NHAI, REC & notified bonds (issued after 1.4.2018) | NHAI, REC & notified bonds |
| Lock-in | 5 years | 5 years |
| Loan against bonds | Deemed conversion → gain taxable | Deemed conversion → gain taxable |
| Effective from | 1 April 2026 | Up to AY 2026-27 |
Related sections
Section 82 — Capital gains exemption on residential house (old 54) Section 84 — Exemption on sale of any long-term asset if house bought (old 54F) Section 67 — Mode of computation of capital gains Section 41 — Capital gains on depreciable assets (old 50) Section 123 — Chapter VI-A deductions (no double deduction) Section 71 — Meaning of long-term and short-term capital assets
Frequently asked questions
What is the maximum amount I can invest under Section 85?
₹50 lakh. Crucially, this cap applies to the total invested in the year of transfer and the following year combined, so you cannot claim exemption on more than ₹50 lakh even by splitting across two financial years.
Does Section 85 apply to gains from shares or mutual funds?
No. Section 85 exemption is available only for long-term capital gains arising from the transfer of land or building (or both). Gains from shares, equity funds, gold or other assets are not eligible for these bonds.
Within how much time must I invest in the bonds?
You must invest within six months from the date of transfer (sale) of the land or building. Missing this deadline means you lose the exemption for that gain.
What happens if I sell the bonds or take a loan against them before 5 years?
The capital gain that was earlier exempted becomes taxable as long-term capital gain in the year you transfer, redeem, or take a loan/advance against the bonds. A loan against the bonds is treated as converting them into money.
Is the interest on these capital-gain bonds tax-free?
No. The interest (currently around 5-5.25% per annum) is fully taxable as income from other sources. The tax benefit lies in saving capital-gains tax, not in the interest.
Can I claim Section 85 and Section 82/84 together?
Yes, you can combine the bond route (Section 85) with the house-purchase route (Section 82 or 84) for the same property sale, provided the same portion of the gain is not claimed twice. This is often needed for large gains exceeding the ₹50 lakh bond cap.
Which bonds qualify under Section 85 in 2026?
Bonds redeemable after 5 years issued by NHAI, REC (RECL) and other issuers notified by the Central Government, such as PFC and IRFC. Always confirm the issue is a notified 54EC/Section 85 capital-gain bond before investing.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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