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Section 85 Income Tax Act 2025: How to Save Capital Gains Tax with Bonds?

Section 85 permits an assessee to claim relief from long-term capital gains tax arising on the transfer of land or a building by investing the gains in eligible specified bonds within six months, subject to statutory conditions.

Legal position: Section 85 of the Income-tax Act, 2025 corresponds broadly to Section 54EC of the Income-tax Act, 1961. It applies under the 2025 Act from 1 April 2026. The actual terms, availability and issuance of qualifying bonds should be checked before investing.
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What does Section 85 of the Income-tax Act, 2025 provide?

Section 85(1) allows the long-term capital gains arising from the transfer of land, a building, or both (the original asset) to be excluded from the charge under Section 67 to the extent the assessee invests those gains in a qualifying long-term specified asset within six months after the transfer.

Where the qualifying investment is smaller than the long-term capital gain, the balance remains chargeable to tax. Where the qualifying investment equals or exceeds the gain, the gain is not charged under Section 67, subject to the statutory investment cap.

Who can claim the exemption and when?

  • The transfer must give rise to long-term capital gains from land or building or both.
  • The assessee must invest the relevant gain in eligible specified bonds within six months after the date of transfer.
  • The relief is based on the capital gain invested, not necessarily the entire sale proceeds.
  • The investment must comply with the monetary ceiling and the five-year restrictions in Section 85.

Section 85 does not limit the benefit expressly to individuals; the assessee must nevertheless satisfy the provision and other applicable tax rules. Short-term capital gains and gains from assets other than land or buildings do not qualify under this section.

What is the maximum exemption under Section 85?

Under Section 85(2), qualifying investment in long-term specified assets out of gains from one or more original assets cannot exceed Rs. 50 lakh during any tax year. The section also prevents investment exceeding Rs. 50 lakh when the year of transfer and the subsequent tax year are considered together. Merely splitting the investment between two tax years does not create a fresh Rs. 50 lakh entitlement for the same transfer.

Practical rule: Subject to the statutory conditions, the exempt amount is generally the lower of the eligible long-term capital gain and the qualifying bond investment, within the Rs. 50 lakh ceiling.

Which bonds qualify and what is the lock-in rule?

Section 85(6) defines a long-term specified asset as a bond redeemable after five years, issued on or after 1 April 2018 by the National Highways Authority of India (NHAI) or Rural Electrification Corporation Limited (REC), or another bond notified by the Central Government for this purpose.

What happens if the bond is sold or used as security?

Under Section 85(3), if the new asset is transferred or converted into money within five years from acquisition, the previously exempt capital gain is deemed taxable as long-term capital gain in the tax year of transfer or conversion. Under Section 85(4), taking a loan or advance against the security of the bond is deemed conversion into money on the date of that loan or advance.

Section 85(5) also disallows a deduction under Section 123 for the same investment if it has already been counted for relief under Section 85.

How is the exemption calculated?

Example 1: Entire gain covered

An assessee earns a long-term capital gain of Rs. 35 lakh on sale of a building and invests Rs. 35 lakh in eligible bonds within six months. Assuming all requirements are met, the entire Rs. 35 lakh gain is eligible for relief under Section 85.

Example 2: Gain exceeds qualifying investment

An assessee earns a long-term capital gain of Rs. 80 lakh on sale of land and invests Rs. 50 lakh in qualifying bonds within six months. Subject to all applicable conditions, Rs. 50 lakh is eligible for relief and the remaining Rs. 30 lakh is chargeable as capital gain under the applicable rules.

Example 3: Early pledge of bonds

An assessee obtains relief of Rs. 40 lakh by purchasing eligible bonds, but after two years takes a loan secured by those bonds. Section 85(4) treats the loan as conversion of the bonds into money; the earlier exempt gain becomes chargeable as long-term capital gain under Section 85(3).

Important statutory terms

Original asset: Land or building, or both, whose transfer gives rise to the relevant long-term capital gains under Section 85(1).
New asset / long-term specified asset: A qualifying five-year redeemable bond described in Section 85(6).
Tax year: The statutory tax-year concept under the Income-tax Act, 2025, relevant to the Rs. 50 lakh investment ceiling and recapture of relief.
Long-term capital gain: A gain arising from transfer of a capital asset held for the applicable long-term holding period, determined under the capital gains provisions, including Sections 67 and 72 and relevant definitions.

Frequently asked questions

Can Section 85 be claimed on sale of shares?

No. Section 85(1) is specifically concerned with long-term gains from transfer of land or building or both.

Can I invest after six months?

Ordinarily, Section 85(1) requires investment within six months after transfer. Any exceptional statutory extension, where applicable, must be separately established; do not assume a general extension.

Can I invest Rs. 50 lakh in each of two consecutive tax years?

Not to obtain Rs. 1 crore of relief for the same original transfer: Section 85(2) limits qualifying investment across the transfer year and subsequent tax year.

Does taking a loan against the bonds affect the exemption?

Yes. A loan or advance secured on the bonds is deemed conversion into money and may trigger taxation of the previously exempt gain.

Official legislation and related provisions

Read the official Section 85 text and the Income-tax Act, 2025 as amended by the Finance Act, 2026. The corresponding earlier provision is Section 54EC of the Income-tax Act, 1961.

Last reviewed: 10 November 2026. This article provides general legal information; individual eligibility and bond issue conditions should be verified for each transaction.