Section 86 of the Income-tax Act, 2025 corresponds to section 54F of the Income-tax Act, 1961 and provides exemption from long-term capital gains when the sale proceeds of a non-residential long-term capital asset are invested in a residential house in India.

Who can claim the exemption?

• Only an Individual or Hindu Undivided Family (HUF).
• The capital gain must arise from transfer of a long-term capital asset other than a residential house.

Conditions

The assessee must:

• Purchase one residential house in India within:
  • 1 year before or
  • 2 years after the date of transfer; or
• Construct one residential house in India within 3 years after the date of transfer.

Amount of exemption

1. If cost of new house ≥ net consideration from sale:

• Entire capital gain is exempt.

• Exemption is proportionate:

Capital Gains Account Scheme (CGAS)

If the amount is not utilized before filing the return:

• The unutilized amount must be deposited in a specified bank/institution under the notified scheme before the due date of return filing.
• The deposited amount is deemed to have been invested in the new house for computing exemption.

Situations where exemption is not available

The exemption cannot be claimed if the assessee:

• Owns more than one residential house (other than the new house) on the date of transfer; or
• Purchases another residential house within 2 years of transfer; or
• Constructs another residential house within 3 years of transfer.

Withdrawal of exemption

The exempt capital gain becomes taxable if:

• The new house is transferred within 3 years of purchase/construction; or
• Another residential house is purchased/constructed within the prohibited period mentioned above.

₹10 crore cap

• Cost of the new residential house exceeding ₹10 crore is ignored for exemption purposes.
• Net consideration exceeding ₹10 crore is also ignored while computing the exemption.

Meaning of Net Consideration

Net consideration = Sale consideration received/accruing minus expenses incurred wholly and exclusively in connection with the transfer.

This is one of the most commonly used capital gains exemption provisions for reinvestment of sale proceeds of assets such as land, commercial property, shares, etc., into a residential house.