Section 87 Income Tax Act 2025: Is Capital Gains Exemption Available on Industrial Relocation?
Section 87 of the Income-tax Act, 2025 provides conditional relief from capital gains tax when an industrial undertaking relocates from a notified urban area to an area outside that urban area and the proceeds are applied to eligible relocation costs.
What does Section 87 provide?
Under Section 87(1), capital gains arising on transfer of specified business assets of an industrial undertaking situated in an urban area may be exempt to the extent of eligible expenditure connected with shifting the undertaking to an area other than an urban area. The underlying charge to capital gains is governed by Section 67.
Who can claim the exemption?
The assessee must have capital gains from transfer, in connection with the shift, of machinery, plant, building, land or rights in building or land used for the business of an industrial undertaking in an urban area. The undertaking must shift to an area outside the notified urban area.
Which expenditures qualify?
Section 87(1)(b) covers costs incurred within one year before or three years after the transfer of the original asset for any of the following:
- Purchasing machinery or plant for the undertaking in the new area.
- Acquiring land or a building, or constructing a building, for its business in the new area.
- Shifting original assets and transferring the establishment of the undertaking to the new area.
- Other purposes specified in a scheme notified by the Central Government.
The provision refers to these qualifying costs and expenses collectively as the new asset.
How much capital gains exemption is available?
The relief is limited to qualifying cost and expenses, up to the amount of capital gains. If eligible expenditure equals or exceeds the capital gain, no capital gain is charged under Section 67 on that transfer. If it is lower, the difference remains taxable.
What if the capital gain has not been fully used?
Under Section 87(2), where the gain has not been used for qualifying new assets within the prescribed period before the return is filed, the unutilised amount must be deposited with a specified bank or institution under the notified scheme. The deposit must be made before filing the return and no later than the due date under Section 263(1); proof of deposit is to accompany the return.
Under Section 87(3), eligible expenditure already incurred together with the qualifying deposit is treated as the cost of the new asset for computing the relief. Under Section 87(4), any deposited amount not utilised within three years from transfer of the original asset becomes taxable under Section 67 in the tax year when that three-year period expires. Withdrawal is governed by the relevant scheme.
What happens if a replacement asset is transferred within three years?
Section 87(1)(B) adjusts the cost of the new asset for computing capital gains on its transfer within three years of its purchase, acquisition, construction or transfer. Where the earlier capital gain was fully sheltered, the relevant cost is taken as nil. Where only part was sheltered, the cost is reduced by the amount of capital gain sheltered. This may increase taxable gains on an early transfer.
Important statutory terms
Urban area - Section 87(5): An area within the limits of a municipal corporation or municipality that the Central Government has declared to be an urban area for this section, having regard to population, concentration of industries, planning needs and other relevant factors. Merely being within municipal limits does not by itself establish the required notification.
Original asset - Section 87(1)(a): The specified machinery, plant, building, land or rights in building or land used for the industrial undertaking's business and transferred in connection with relocation.
New area - Section 87(1)(a): The destination area other than the relevant urban area to which the industrial undertaking is shifted.
New asset - Section 87(1)(b): The qualifying costs and expenses for plant, machinery, land, buildings, shifting and other notified purposes.
Tax year: The tax year in which the relevant transfer or subsequent taxable event is recognised under the Act.
Practical examples
Example 1: Full exemption
An industrial undertaking earns capital gains of Rs. 80 lakh on eligible assets sold while shifting from a notified urban area. It incurs Rs. 95 lakh on eligible new plant, premises and shifting expenses within the statutory period. Subject to all conditions, the Rs. 80 lakh capital gain is exempt.
Example 2: Partial exemption
If eligible capital gains are Rs. 80 lakh and qualifying relocation expenditure is Rs. 50 lakh, the exemption is Rs. 50 lakh and the remaining Rs. 30 lakh is chargeable under the capital gains provisions.
These examples are illustrative and assume the notification, timing, asset and documentary conditions are satisfied.
Frequently asked questions
Is relocation to another urban area eligible under Section 87?
No. Section 87 concerns a shift to an area other than the relevant notified urban area. A shift to a Special Economic Zone may require separate examination under Section 88.
Can relocation expenses qualify even if no new factory building is purchased?
Yes, qualifying expenses include shifting original assets and transferring the establishment, subject to the conditions of Section 87(1)(b).
What is the investment deadline?
Eligible costs must be incurred within one year before or three years after transfer of the original asset. Unspent amounts may require timely deposit under the notified scheme.
Does Section 87 automatically exempt all sale proceeds?
No. The relief is computed with reference to capital gains and eligible expenditure, not automatically on the entire sale consideration.
Statutory reference
Read the official Income Tax Department text of Section 87. For related provisions, see Income-tax Act, 2025 index and Section 263 concerning return filing.
Last reviewed: 10 November 2026. This article is general legal information; applicability depends on statutory notifications, notified schemes and the facts of the transaction.