Section 85
Section 85: capital gains exemption on investment in specified bonds
Section 85 lets a taxpayer avoid tax on long-term capital gains from selling land or a building by reinvesting the gains, within six months, into specified long-term bonds such as those issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC). It caps how much can be invested this way and locks the investment in for five years.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
What Section 85 says
Where an assessee has long-term capital gains from transferring land or building (or both) - the "original asset" - and within six months of that transfer invests all or part of the gains in a "long-term specified asset" (the "new asset"), the gains are treated as follows: if the gains exceed the amount invested, only the excess is charged to tax under Section 67; if the gains are equal to or less than the amount invested, none of the gains are charged to tax.
The ₹50 lakh investment cap
The amount that can be invested in the long-term specified asset out of capital gains from one or more original assets cannot exceed ₹50 lakh - whether counted during any single tax year, or across the year of transfer and the following tax year taken together.
Five-year lock-in and what breaks it
If the new asset (the bond) is transferred, or converted into money in any other way, within five years of acquisition, the capital gains that were earlier not charged to tax become chargeable as long-term capital gains in the tax year of that transfer or conversion.
Taking a loan or advance against the security of the new asset is itself treated as converting the new asset into money, on the date the loan or advance is taken - so pledging the bond as collateral triggers the same consequence as selling it.
No double benefit with Section 123
If the investment in the new asset has already been taken into account for the Section 85 exemption, no deduction can also be claimed for the same investment under Section 123 (the combined ₹1,50,000 deduction section) for any tax year.
What counts as a "long-term specified asset"
- A bond redeemable after five years, issued on or after 1 April 2018, by the National Highways Authority of India
- A similar bond issued by the Rural Electrification Corporation Limited
- Any other bond notified by the Central Government for this purpose
Frequently asked questions
How long do I have to invest my capital gains under Section 85?
Within six months after the date of transfer of the original land or building.
Is there a limit on how much I can invest under Section 85?
Yes - a maximum of ₹50 lakh, whether measured in a single tax year or across the year of transfer and the following tax year combined.
What happens if I sell the bonds before five years?
The capital gains that were earlier exempted become taxable as long-term capital gains in the tax year the bonds are sold or converted into money. Taking a loan against the bonds is also treated as converting them into money.
Can I also claim Section 123 deduction on the same investment?
No - once an investment has been used to claim the Section 85 exemption, it cannot also be claimed as a deduction under Section 123.
Related sections
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Plan your capital gains reinvestment with our tax teamLast updated 9 September 2026