Section 86 · Computation of total income
Section 86 of the Income-tax Act, 2025 — Capital Gains Exemption on Investment in a Residential House (old Section 54F)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter IV
📜 What the law says — Section 86, Income-tax Act 2025
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.
(2) If the net consideration referred to in sub-section (1) is not utilised by the
assessee to purchase the new asset within one year before the date of transfer of the
original asset, or is not utilised for the purchase or construction of the 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 before the filing of the return and not later
than the due date applicable in the case of the assessee for filing the
return of income under section 263; and
(c) the proof of deposit shall be submitted along with such return.
(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-sec-
tion (2) shall, subject to sub-section (8), be deemed to be the cost of the new asset.
(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 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
In plain language
What Section 86 means in plain English
Section 86 of the Income-tax Act, 2025 (which replaces the old Section 54F of the Income-tax Act, 1961, with effect from 1 April 2026) lets you save long-term capital gains tax when you sell any long-term capital asset other than a residential house — such as land, listed or unlisted shares, mutual funds, gold, jewellery or a plot — and reinvest the net sale consideration in one residential house in India.
- The core idea: unlike Section 82 (old Section 54, for sale of a house), here you sell a non-house asset. So the law asks you to reinvest the whole net consideration, not merely the gain.
- Full vs partial: if you reinvest the entire net consideration, the whole long-term capital gain is exempt. If you reinvest only part, the exemption is proportionate.
Who can claim it
- Only an Individual or a Hindu Undivided Family (HUF). Companies, LLPs and firms cannot use Section 86.
- The asset sold must be a long-term capital asset and must not be a residential house (a house sale goes to Section 82).
Key conditions and time limits
- Buy: a residential house within 1 year before or 2 years after the date of transfer of the original asset.
- Construct: a residential house within 3 years after the date of transfer.
- One house only: the reinvestment must be in a single residential house located in India.
- ₹10 crore cap: for computing the exemption, both the cost of the new house and the net consideration are capped at ₹10 crore. Any amount above ₹10 crore is ignored.
The proportional exemption formula
When the net consideration exceeds the cost of the new house, the exempt gain is:
- Exempt LTCG = Capital Gain × (Cost of new house ÷ Net consideration)
- "Net consideration" = full sale value minus expenses wholly and exclusively incurred on the transfer (like brokerage). If cost of new house ≥ net consideration, the entire gain is exempt.
Ownership restrictions (very important)
Section 86 is denied — or a claimed exemption is withdrawn — if the taxpayer:
- Owns more than one residential house (other than the new one) on the date of transfer of the original asset; or
- Buys another residential house within 2 years, or constructs another within 3 years, of that transfer (income of which is taxable under "Income from house property").
Capital Gains Account Scheme (CGAS)
- If you cannot reinvest before the due date of filing your return, deposit the unutilised amount in a Capital Gains Account Scheme account with a notified bank and attach proof with the return.
- The deposited money must be used to buy/construct within the time limits, otherwise the unused part is taxed later.
Charge-back (when the exemption reverses)
- Lock-in: if the new house is sold within 3 years of purchase/construction, the earlier exempt gain is taxed as long-term capital gain in the year of that sale.
- Unused CGAS money: if the deposited amount is not used within the time limits, the proportionate exempt gain becomes taxable long-term capital gain after 3 years.
Practical implications
- Section 86 is a powerful tool for people cashing out shares, mutual funds or land who want to shift wealth into a home while deferring/eliminating LTCG tax.
- Because you must reinvest the whole net consideration (not just the gain), partial reinvestment gives only partial relief — plan the house budget carefully.
- The ₹10 crore cap curbs very high-value planning, effectively limiting exemption on ultra-luxury purchases.
💡 Example
Example 1 — Full exemption. Ravi sells listed shares (held 5 years) for a net consideration of ₹80 lakh, on which his long-term capital gain is ₹50 lakh. He buys a flat in Jaipur for ₹85 lakh within a year. Since the cost of the new house (₹85 lakh) is more than the net consideration (₹80 lakh), the entire ₹50 lakh gain is exempt under Section 86 and his LTCG tax is nil.
Example 2 — Partial exemption. Meena sells a plot of land for a net consideration of ₹1 crore, with a long-term capital gain of ₹60 lakh. She reinvests only ₹60 lakh in a new house. Exempt gain = ₹60 lakh × (₹60 lakh ÷ ₹1 crore) = ₹36 lakh exempt. The balance ₹24 lakh is taxable as LTCG. If she had reinvested the full ₹1 crore, all ₹60 lakh would have been exempt.
A relatable story. Anil, a 58-year-old retiree in Jaipur, sold his inherited gold and some mutual funds and made a ₹40 lakh long-term gain. He worried about a big tax bill. His CA explained Section 86: if he reinvested the entire ₹90 lakh sale proceeds into a single flat within two years and did not already own more than one house, the whole gain would escape tax. Anil bought a ₹95 lakh flat, kept the papers and CGAS proof, and paid zero LTCG — but his CA warned him not to sell the flat for three years, or the exemption would reverse.
| Feature | Section 86 (old 54F) — non-house asset | Section 82 (old 54) — sale of house |
|---|
| Asset sold | Any long-term asset except a residential house (shares, land, gold, etc.) | Long-term residential house property |
| Who can claim | Individual / HUF | Individual / HUF |
| Amount to reinvest | Net sale consideration (full proceeds) | Only the capital gain |
| Buy new house | 1 year before to 2 years after | 1 year before to 2 years after |
| Construct new house | Within 3 years | Within 3 years |
| Exemption cap | ₹10 crore (on cost & net consideration) | ₹10 crore |
| Ownership limit | Must not own more than 1 other house | No such "more than one house" bar |
| Lock-in on new house | 3 years | 3 years |
| CGAS deposit if unused | Yes | Yes |
Related sections
Section 82 — Capital gains exemption on sale of a residential house (old 54) Section 85 — Exemption for compulsory acquisition of land and buildings (old 54D) Section 87 — Exemption on investment in bonds / NHAI-REC (old 54EC) Section 67 — Computation of capital gains (charging mechanism) Section 88 — Extension of time in certain capital gains exemption cases Section 196 — Rates of tax on long-term capital gains
Frequently asked questions
Is Section 86 of the 2025 Act the same as Section 54F of the old Act?
Yes. Section 86 of the Income-tax Act, 2025 is the re-enacted version of Section 54F of the Income-tax Act, 1961, effective from 1 April 2026, with the same core conditions and the ₹10 crore cap.
Do I have to reinvest only the gain or the full sale amount?
Under Section 86 you must reinvest the entire net sale consideration to get full exemption; reinvesting only part gives a proportionate exemption. This is different from Section 82, where only the gain needs reinvestment.
Can I claim Section 86 if I already own a house?
You can own one other residential house, but if you own more than one house (besides the new one) on the transfer date, the exemption is denied. Buying or constructing another house within the specified periods also disqualifies you.
What is the maximum exemption I can claim?
The exemption is capped by treating both the cost of the new house and the net consideration as not exceeding ₹10 crore. Any amount above ₹10 crore is ignored in the computation.
What happens if I sell the new house soon after buying it?
If you transfer the new residential house within 3 years of purchase or construction, the capital gain earlier exempted is taxed as long-term capital gain in the year of that transfer.
Can the new house be located outside India?
No. To claim Section 86, the residential house must be purchased or constructed in India.
What if I can't buy the house before filing my return?
Deposit the unutilised amount in a Capital Gains Account Scheme account with a notified bank before the return due date and attach proof. Use it within the time limits, or the unused portion becomes taxable later.
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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