Section 86 — Other LTCG to Residential House 54F | ITA 2025

Section 86 — - INVESTMENT IN RESIDENTIAL HOUSE (FROM OTHER LTCG-ELIGIBLE ASSET)

Section 86 is the substantive equivalent of 1961 s. 54F -- the COMPANION reinvestment exemption to s. 82 (residential-house-to-residential-house). Section 86 covers individuals / HUFs whose LTCG arises from transfer of ANY long-term capital asset OTHER than a residential house (e.g., shares / bonds / commercial property / land / jewellery / VDA pre-FA 2022) and who reinvest in ONE residential house in India. KEY DISTINCTION from s. 82: s. 86 uses NET-CONSIDERATION (not LTCG) as the reinvestment benchmark; the exemption is PROPORTIONATE -- if entire net-consideration is reinvested, full LTCG exempt; partial reinvestment yields proportionate exemption. TEN sub-sections cover: (1) eligibility / windows / proportionate exemption; (2) CGAS deposit; (3) deemed cost; (4) X-Y formula on partial utilisation failure; (5) NEGATIVE CONDITION -- cannot own >1 other residential house at transfer / acquire additional within windows; (6) anti-cascade if subsequent residential house bought; (7) 3-year holding lock claw-back; (8) FA 2024 INR 10 cr cost cap; (9) FA 2024 INR 10 cr net-consideration cap; (10) 'net consideration' definition. Practitioner-grade rule: this is the EXIT ROUTE for shares / commercial property / business-trust units / VDA-CG (where LTCG-eligible) into residential housing -- but the negative condition under sub-s. (5) catches many HNW assessees who own multiple residences.

Statutory text — Income-tax Act, 2025

Marginal note -- Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house

(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 not have been charged under section 67, if the cost of the new asset had been taken to be the amount actually utilised for purchase or construction of the new asset;

(b) the assessee shall be entitled to withdraw such unutilised amount in accordance with the scheme referred to in sub-section (2).

(5) The provisions of sub-section (1) shall not apply, if—

(a) the assessee—

(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

(ii) purchases any residential house, other than the new asset, within one year of transfer of the original asset; or

(iii) constructs any residential house, other than the new asset, within three years of transfer of the original asset; and

(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.

(6) If the assessee purchases, within two years after the date of transfer of the original asset, or constructs, within three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset, the capital gains not charged under section 67 on the basis of cost of such new asset as per sub-section (1), shall be charged as long-term capital gains of the tax year in which such residential house is purchased or constructed.

(7) If the new asset is transferred within three years from the date of purchase or its construction, the capital gains not charged under section 67 on the basis of cost of such new asset as per sub-section (1) shall be charged as long-term capital gains of the tax year in which such new asset is transferred.

(8) If the cost of the new asset exceeds ten crore rupees, the amount exceeding ten crore rupees, shall not be taken into account for the purposes of sub-section (1).

(9) If the net consideration on the transfer of original asset exceeds ten crore rupees, the amount exceeding ten crore rupees, shall not be taken into account for the purposes of sub-section (2).

(10) For the purposes of this section, “net consideration”means the full value of the consideration received or accruing as a result of the transfer of the original asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 86	INCOME-TAX ACT, 1961 -- s. 54F
s. 86(1) -- LTCG on any non-residential long-term capital asset; reinvest in 1 residential house (India)	1961 s. 54F(1)
s. 86(1)(i) -- Net consideration > cost: PROPORTIONATE exemption = LTCG × (cost / net consideration)	1961 s. 54F(1)(a)
s. 86(1)(ii) -- Net consideration <= cost: FULL exemption	1961 s. 54F(1)(b)
s. 86(2) -- CGAS deposit before s. 263 due date	1961 s. 54F(4)
s. 86(3) -- Utilised + deposited = deemed cost (subject to sub-s. 8 cap)	1961 s. 54F(4) Proviso
s. 86(4) -- X-Y formula for unutilised CGAS at expiry	1961 s. 54F(4) Proviso
s. 86(5) -- NEGATIVE CONDITION: cannot own >1 other residential house at transfer or acquire additional within windows	1961 s. 54F(1) Proviso
s. 86(6) -- Anti-cascade: subsequent residential house in 2y/3y windows triggers reversal	1961 s. 54F(2)
s. 86(7) -- 3-year holding lock claw-back	1961 s. 54F(3)
s. 86(8) -- FA 2024 INR 10 cr CAP on cost of new asset	1961 s. 54F Proviso (FA 2024)
s. 86(9) -- FA 2024 INR 10 cr CAP on net consideration for sub-s. 2 deposit	1961 s. 54F Proviso (FA 2024)
s. 86(10) -- 'Net consideration' = FVOC less transfer expenditure	1961 s. 54F Explanation

STATUTORY ARCHITECTURE -- THE PROPORTIONATE-EXEMPTION REGIME

ELIGIBILITY (sub-s. 1): (a) ASSESSEE: INDIVIDUAL or HUF only. (b) ORIGINAL ASSET: any LONG-TERM CAPITAL ASSET, NOT being a residential house. Examples qualifying: listed equity / equity-MF units (LTCG > INR 1.25L exemption -- s. 198); unlisted equity; debentures / bonds; commercial property; agricultural land outside specified areas (where qualifying as capital asset under s. 2); jewellery / paintings / VDA (FA 2022 onwards); business-trust units; gold ETF / sovereign gold bond CG; foreign shares. Excludes: residential house (covered by s. 82); short-term capital asset (no LTCG character); stock-in-trade; agricultural land outside scope of CG. (c) HOLDING PERIOD: must be LONG-TERM. Holding-period rules vary by asset class (24 months for unlisted shares / property; 12 months for listed shares / equity-MF / business-trust units; 36 months for jewellery / VDA / non-listed bonds). (d) REINVESTMENT WINDOW: same as s. 82 -- 1 year before / 2 years after PURCHASE; 3 years after CONSTRUCTION. (e) NEW ASSET: ONE RESIDENTIAL HOUSE IN INDIA. Note: s. 86 has NO equivalent of FA 2019 two-house option (which is s. 82-only). PROPORTIONATE EXEMPTION (sub-s. 1(i)/(ii)): (i) NET CONSIDERATION > COST: exempt CG = CG × (cost of new asset / net consideration). Partial reinvestment yields proportionate exemption. (ii) NET CONSIDERATION <= COST: FULL CG exempt. Worked example: Sale of unlisted shares: net consideration INR 100 cr, LTCG INR 60 cr; new residential house INR 50 cr. Exempt LTCG = 60 cr × (50 cr / 100 cr) = INR 30 cr. Chargeable LTCG = INR 30 cr. KEY DISTINCTION FROM s. 82: s. 82 measures reinvestment against LTCG (use any LTCG amount); s. 86 measures against NET CONSIDERATION (must reinvest entire sale proceeds, not just gain, for full exemption). This makes s. 86 STRICTER -- requires full sale-proceeds redeployment.

SUB-SECTION (5) -- THE NEGATIVE CONDITION (HNW TRAP)

Section 86 is UNAVAILABLE to assessees who: (I) Own MORE THAN ONE OTHER RESIDENTIAL HOUSE (other than the new asset) on the date of transfer of original asset; OR (II) Purchase ANY OTHER residential house within 1 YEAR of transfer of original asset; OR (III) Construct ANY OTHER residential house within 3 YEARS of transfer of original asset, AND the income from such other residential house IS CHARGEABLE under HP head. Effectively: the assessee may own UP TO ONE other residential house (apart from new asset) at transfer date; cannot acquire any further during reinvestment windows. Common HNW failure: assessee already owns 3-4 residential properties; selling commercial property / shares with intent to claim s. 86 -- DISQUALIFIED. The provision targets the 'first residential house' character of the new asset. The 'income chargeable under HP head' qualifier ensures self-occupied OR let-out properties count; truly empty / under-construction not yet let out may avoid disqualification. Self-occupied house: chargeable under HP at NIL annual value (post FA 2019 two-houses-NIL-AV rule). Practitioner: complete property-portfolio audit BEFORE structuring s. 86 claim; for assessees with 2+ residential houses, s. 86 unavailable; consider gifting one residence to spouse / child via s. 70(1)(b) tax-neutral transfer to bring ownership below threshold.

SUB-SECTION (6) -- ANTI-CASCADE FOR SUBSEQUENT RESIDENTIAL HOUSE PURCHASE

If assessee, AFTER claiming s. 86 exemption, subsequently PURCHASES (within 2 years post original-transfer) or CONSTRUCTS (within 3 years post original-transfer) ANY OTHER residential house chargeable under HP head -- the previously-exempt CG SHALL BE CHARGED as LTCG in the year of such subsequent purchase / construction. Effect: assessee who claims s. 86 must NOT acquire additional residential properties during the 3-year window or face full reversal. The ANTI-CASCADE is harsher than s. 82 (which only has the 3-year sale-of-new-asset claw-back). Practical implication: post s. 86 claim, freeze new residential acquisitions for 3 years; if business / family circumstances require additional purchase, factor in the LTCG-revival cost.

SUB-SECTIONS (7)-(9) -- OTHER ANTI-AVOIDANCE / CAPS

(VII) 3-YEAR HOLDING LOCK (sub-s. 7): if NEW ASSET (residential house) is transferred within 3 years of purchase / construction, the previously-exempt LTCG shall be charged as LTCG in the year of such transfer. Mirror of s. 82(1)(i)/(ii) cost-reduction-claw-back, but here entire exempt CG revives, not just cost-base reduction. (VIII) FA 2024 INR 10 CRORE COST CAP (sub-s. 8): cost of new asset exceeding INR 10 crore not taken into account. So for ultra-HNW reinvestment in INR 50 cr villa, only INR 10 cr counts as 'cost' for proportionate exemption. (IX) FA 2024 INR 10 CRORE NET-CONSIDERATION CAP (sub-s. 9): net consideration exceeding INR 10 crore not taken into account for sub-s. 2 deposit. So for INR 100 cr sale, CGAS deposit eligible only on INR 10 cr -- excess INR 90 cr remains taxable. WORKED EXAMPLE -- POST-FA 2024: A sells unlisted shares; net consideration INR 100 cr, LTCG INR 70 cr; reinvests INR 50 cr in residential house. Sub-s. (8) cost capped INR 10 cr; sub-s. (9) net-consideration capped INR 10 cr. Effective: cost = INR 10 cr; net consideration = INR 10 cr. Exempt CG = LTCG INR 70 cr × (INR 10 cr / INR 10 cr) = INR 70 cr -- WAIT, this would be wrong since the full CG would be capped against capped consideration only -- need to interpret cap carefully. More accurate reading: the caps prevent disproportionate exemption; only INR 10 cr cost / INR 10 cr net-consideration recognised; but underlying LTCG remains INR 70 cr (uncapped). Exempt = 70 cr × (10/10) = INR 70 cr. So full exemption preserved up to INR 10 cr investment-capping benchmark. Excess remains chargeable. The exact arithmetic depends on Rule-prescribed methodology; CBDT clarification awaited.

SUB-SECTION (10) -- 'NET CONSIDERATION' DEFINITION

'NET CONSIDERATION' = Full Value of Consideration on transfer of original asset MINUS expenditure incurred WHOLLY AND EXCLUSIVELY in connection with such transfer. Effectively: gross sale proceeds less brokerage / legal / stamp-duty-paid-by-transferor / advertising / DD-fees / etc. (similar deductions as under s. 72 but specifically for s. 86 mechanics). Practitioner: maintain transfer-expense ledger separately; net-consideration determination drives the proportionate exemption ratio.

CASE LAW -- LEADING DECISIONS

(i) CIT v. Smt. Maya Kumari (Del HC) -- s. 54F vs s. 54: distinct frameworks; net-consideration vs LTCG benchmark. (ii) CIT v. Sunita Aggarwal (Del HC, 2018) -- pre-FA 2014 multiple-house issues; codified afterwards. (iii) CIT v. Smt. K.G. Rukminiamma (Kar HC, 2011) -- 'one residential house' liberal-reading pre-FA 2014. (iv) FA 2014 amendment: 'a residential house' = singular. (v) CIT v. P.R. Seshadri (Mad HC) -- timing of CGAS deposit vs return-filing; substantial-compliance principle. (vi) Vishwapriya Financial Services v. CIT (ITAT Mumbai) -- net-consideration vs gross consideration distinction. (vii) CIT v. T.K. Arumugha Naidu (Mad HC) -- previous-house ownership test under sub-s. 5 negative condition. (viii) Mrs. Krishnaben Maganbhai Patel (Guj HC) -- spouse-name residential house funded by assessee qualifies. (ix) Pre-FA 2024 / Post-FA 2024 transition cases -- INR 10 cr cap interpretation pending.

PLANNING NOTES (TWELVE AREAS)

(i) ASSET CLASSIFICATION -- verify long-term character; for shares / equity-MF, 12 months; for property / unlisted shares, 24 months; for gold / VDA / non-listed bonds, 36 months. (ii) NEGATIVE CONDITION COMPLIANCE (sub-s. 5) -- complete residential property portfolio audit BEFORE structuring; cannot own >1 other residential house at transfer date. Common HNW disqualifier. (iii) NET CONSIDERATION OPTIMISATION -- maximise reinvestment closer to net-consideration to achieve full exemption (proportionate). (iv) CGAS DISCIPLINE -- before s. 263 due date; SBI / PSU bank designated account; submit deposit-proof with return. (v) WINDOW MANAGEMENT -- 1y before / 2y after purchase; 3y construction; track milestones; document agreement / payment trail. (vi) ANTI-CASCADE (sub-s. 6) -- DO NOT acquire any other residential house during 3-year post-transfer window; freeze new acquisitions. (vii) 3-YEAR HOLDING LOCK -- DO NOT transfer new asset within 3 years; full reversal on early transfer (vs s. 82 cost-reduction approach -- harsher in s. 86). (viii) FA 2024 CAPS -- INR 10 cr cost cap and INR 10 cr net-consideration cap; for HNW, gain > INR 10 cr partly remains taxable. (ix) JOINT OWNERSHIP -- spouse / child co-name funded from assessee's CGAS allowed; document funding-trail. (x) EQUITY/MF CG ROUTING -- listed equity LTCG > INR 1.25L (s. 198) can be reinvested via s. 86 to defer indefinitely (subject to FA 2024 caps). Useful for HNW exit-realisations. (xi) UNDER-CONSTRUCTION HOUSE -- substantial-completion within 3 years; agreement-of-sale with payment-trail; CC obtained. (xii) DOCUMENTATION -- (a) original sale documentation; (b) net-consideration computation; (c) residential-portfolio status (negative condition); (d) reinvestment plan; (e) CGAS deposit; (f) utilisation evidence; (g) FA 2024 cap working.

CROSS-REFERENCES

Section 67 -- Capital Gains charge.
Section 70 -- Transactions not regarded as transfer.
Section 71 -- Withdrawal of exemption.
Section 72 -- Mode of computation.
Section 82 -- Residential house reinvestment exemption (sister provision).
Section 89 -- Reference to Valuation Officer.
Section 197 / 198 -- LTCG rates.
Section 263 -- Return of income (CGAS deposit anchor date).
Capital Gains Account Scheme, 1988 -- CGAS-88 scheme.
Section 20 / s. 22 -- HP head charge (sub-s. 5 negative condition reference).

← All sections (537)Act 2025 hub