Section 87 of the Income-tax Act, 2025 — Capital Gains Exemption on Shifting an Industrial Undertaking from an Urban Area

In plain language

What Section 87 is about

Section 87 of the Income-tax Act, 2025 gives a capital gains exemption when a business physically relocates its industrial undertaking out of a congested urban area to a non-urban area (a rural, semi-urban or any area that the Central Government has not declared as "urban"). The idea is simple and policy-driven: the government wants to decongest cities and push industry into the interiors, so it says — if you sell your old plant, machinery, building or land in the city, and you use that money to re-establish the same undertaking outside the city, you should not be taxed on the capital gain to the extent you reinvest.

This provision is the direct successor to the old Section 54G of the Income-tax Act, 1961. The wording has been simplified and re-numbered in the 2025 Act (effective 1 April 2026), but the substance — the assets covered, the one-year-before / three-years-after window, the deposit rule and the three-year lock-in — carries over almost unchanged.

Who can claim it

• Any category of person — individual, HUF, firm, LLP, company, AOP — running an industrial undertaking can claim, provided the undertaking is actually being shifted.
• There is no upper limit on the amount of exemption; it is capped only by the amount you reinvest and by the capital gain itself.
• The exemption applies to both short-term and long-term capital gains on the eligible business assets — unlike many other exemptions that are restricted to long-term gains only.

Which assets qualify

The capital gain must arise from transfer of a capital asset that was used for the business of the industrial undertaking situated in the urban area, being:

• Plant or machinery;
• Building or land, or any rights in a building or land.

The asset must have been genuinely used for the urban undertaking that is being moved — you cannot dress up an ordinary sale of city property as a "shifting".

The core conditions

• Direction of shift: from an urban area to any area other than an urban area. "Urban area" means an area within the limits of a municipal corporation or municipality that the Central Government notifies as urban, considering population, industrial concentration and planning needs.
• Time window for reinvestment: the new assets/expenses must fall within 1 year before or 3 years after the date of transfer of the old urban asset.
• What the money must be spent on: (a) purchase of new plant or machinery for the shifted undertaking; (b) acquisition of building or land, or construction of a building, in the new area; (c) expenses of shifting the original undertaking and its establishment; and (d) any other purpose specified in a Central Government notified scheme.

How the exemption is computed

The exemption is the lower of the capital gain or the total amount reinvested (cost of new plant/machinery + new land/building + shifting expenses). If you reinvest the whole gain, the entire gain is exempt. If you reinvest only part, the shortfall (gain minus amount reinvested) is taxed as capital gain.

Capital Gains Account Scheme (the deposit rule)

You rarely finish reinvesting before your income-tax return is due. So the law says: any amount you have not yet spent by the due date for filing your return must be deposited in the Capital Gains Account Scheme (CGAS) in a notified bank, and proof attached with the return. Amounts deposited count as "utilised" for now. If the deposited money is not actually used within the 3-year window, the unused portion becomes taxable in the year the 3-year period expires.

The three-year lock-in (recapture)

If you sell any of the new assets within 3 years of acquiring/constructing them, the exemption is effectively clawed back: for computing the capital gain on that later sale, the cost of the new asset is reduced by the exemption you earlier claimed (and can be treated as nil to that extent). This prevents people from claiming the exemption and then quickly flipping the new asset.

Practical implications

• Keep clear documentation that the move is a genuine shifting of the undertaking — board resolutions, factory licences at the new site, transport bills, new electricity/pollution NOCs.
• Plan the sale and purchase so the reinvestment stays inside the 1-year-before to 3-years-after window; missing it costs the entire exemption.
• Use the CGAS deposit as a safety valve if you cannot spend before the return due date.
• Do not dispose of the new plant/land/building for at least 3 years, or the benefit reverses.
• Note the sister provision Section 88 (old Section 54GA), which gives similar relief when the shift is specifically to a Special Economic Zone — the urban-area restriction is relaxed there.