Section 85 — Investment in Specified Bonds 54EC | ITA 2025

Section 85 — INVESTMENT IN SPECIFIED BONDS — LTCG EXEMPTION (s. 54EC)

Section 85 is the substantive equivalent of 1961 s. 54EC. Where LTCG arises from transfer of land or building (or both) and the assessee invests within 6 months in 'long-term specified asset' (NHAI / REC / IRFC / PFC bonds — typically 5-year lock-in), the LTCG is exempt to the extent of investment, capped at ₹ 50 lakh per financial year per assessee. ANY assessee eligible (individual / HUF / company / firm). Sub-section (1) — exemption mechanism. Note: post FA 2018, scope was restricted to land/building (previously included any LTCG asset).

Statutory text — Income-tax Act, 2025

Marginal note — Capital gains not to be charged on investment in certain bonds

(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.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 85	INCOME-TAX ACT, 1961 — s. 54EC
s. 85(1) — LTCG on land/building → 6m investment in specified bonds	1961 s. 54EC(1)
Annual cap ₹ 50 lakh per assessee per FY	1961 s. 54EC second proviso
5-year lock-in (post FA 2018; was 3 years pre-FA 2018)	1961 s. 54EC(2) read with 'long-term specified asset' definition
Eligible bonds — NHAI / REC / IRFC / PFC notified	Same
Restricted to LAND/BUILDING only post FA 2018 (was 'any' LTCG asset earlier)	1961 s. 54EC(1) post FA 2018 amendment

STATUTORY ARCHITECTURE

Eligible LTCG — only from transfer of LAND OR BUILDING OR BOTH (post FA 2018; previously 'any LTCG asset' qualified). Reinvestment window — within 6 months from date of transfer. Eligible asset — 'long-term specified asset' = bonds notified by CG (currently NHAI 54EC, REC 54EC, IRFC 54EC, PFC 54EC). Lock-in — 5 years (post FA 2018; was 3 years before). Premature redemption / mortgage / hypothecation triggers immediate CG-charge in year of breach. Cap — ₹ 50 lakh per assessee PER FINANCIAL YEAR (NOT per transaction). The 6-month window may straddle two financial years — careful planning permits stacking.

CASE LAW

CIT v. Coromandel Industries Ltd (Mad HC) — 6-month investment window strictly construed; one-day delay disqualifies. Smt. Vasanthi Punj v. ITO (ITAT Mum) — straddling two FYs → ₹ 50 lakh cap APPLICABLE PER FY; ₹ 1 cr aggregate possible if window straddles. ACIT v. Aspi Ginwala (ITAT Mum) — investment date = bond ALLOTMENT date (not application date).

PLANNING NOTES

(i) For LTCG > ₹ 50 lakh from land/building, plan transfer-date in February/March to straddle two FYs → invest ₹ 50 lakh in current FY + ₹ 50 lakh in next FY (aggregate ₹ 1 cr). (ii) Maintain bond-allotment letter as the documentary anchor for 6-month window compliance. (iii) For combination with s. 82 (residential house) or s. 86 (other LTCG asset → residential house), check overlap — same LTCG cannot fund both s. 85 and s. 82/86 (no double-dip). (iv) 5-year lock-in — model liquidity needs; bonds typically yield ~5%-5.5% (lower than market) in exchange for tax exemption. Net post-tax IRR comparison.

CROSS-REFERENCES

Section 82 / 86 — Residential-house reinvestment exemptions (alternatives).
Section 67 — Capital Gains charge.
CBDT Notifications — designated 54EC bond issuers.
Section 198 — LTCG rate (12.5% post FA 2024).

← All sections (537)Act 2025 hub