Section 88 of the Income-tax Act, 2025 — Capital Gains Exemption on Shifting an Industrial Undertaking to a Special Economic Zone (SEZ)

In plain language

What Section 88 is all about

Section 88 of the Income-tax Act, 2025 gives a capital gains tax exemption to businesses that move an industrial undertaking out of an urban area and re-establish it inside a Special Economic Zone (SEZ). When you shift a factory, you usually have to sell or transfer the old land, building, plant and machinery. That transfer can trigger a big capital gains tax bill. Section 88 says: if you plough that gain back into setting up the undertaking in an SEZ, you don't pay tax on it (fully or partly). This is the direct successor to Section 54GA of the Income-tax Act, 1961 — the wording has been simplified but the substance is the same.

Who can claim it

• Any assessee — individual, HUF, firm, LLP, company — that owns an industrial undertaking situated in an urban area.
• The move must be from the urban area to any Special Economic Zone (whether that SEZ is inside or outside an urban area does not matter).
• "Urban area" takes the meaning given in Section 87 (the SEZ's sister provision that covers urban-to-non-urban shifting, successor to old Section 54G).

Which assets qualify

• Machinery or plant used for the business of the undertaking.
• Building or land, or any right in a building or land, used for that undertaking.

The gain can be short-term or long-term; Section 88 does not restrict itself to long-term assets, which is a helpful feature for machinery (usually short-term).

How the exemption is worked out

Within one year before or three years after the date of transfer, the assessee must, for the purpose of the SEZ undertaking:

• purchase new plant and machinery;
• acquire building or land, or construct a building, in the SEZ;
• shift the original asset and transfer the establishment to the SEZ; and
• incur other notified expenses under a scheme framed by the Central Government.

Add up this "cost of relocation". If it is equal to or more than the capital gain, the entire gain is exempt. If it is less, only the shortfall (gain minus amount reinvested) is taxed.

Capital Gains Account Scheme (CGAS)

If you have not spent the money before the due date for filing your return, you must deposit the unutilised amount in the Capital Gains Account Scheme with a specified bank, and file proof of deposit with the return. You then draw it down to fund the SEZ set-up. Any amount not used within three years becomes taxable as capital gains in the year the three-year window expires.

Lock-in on the new asset

If the new asset is sold within three years of its purchase or construction, the exemption is clawed back: the cost of the new asset is reduced by the exempted gain (or treated as nil), which increases the gain on that later sale. So keep the SEZ assets for at least three years.

Practical implications

• Section 88 is a deferral-plus-reinvestment relief, not a permanent write-off — the benefit survives only if you genuinely re-invest and hold.
• It is a strong incentive for manufacturers wanting to exit congested urban land (high value, ripe for redevelopment) and re-establish in an SEZ with export and infrastructure advantages.
• Timing matters: purchases up to one year before the transfer also count, so early SEZ construction is protected.