Section 87

Section 87: capital gains exemption on shifting an industrial undertaking out of an urban area

Section 87 exempts capital gains that arise when a business shifts its industrial undertaking out of an urban area, so long as the gains are reinvested in setting up the undertaking at the new (non-urban) location - buying new machinery or plant, acquiring or constructing a building or land, physically shifting the old assets, and other notified shifting expenses.

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 87 says

Where the assessee has capital gains from transferring machinery, plant, building, land, or rights in building or land, used for the business of an industrial undertaking situated in an urban area, effected in the course of shifting that undertaking to a non-urban area, and within one year before or three years after the transfer the assessee purchases new machinery or plant, acquires or constructs building or land, shifts the original asset and transfers the establishment, or incurs expenses on other notified purposes (together the "new asset"), then instead of the gains being taxed as income of the transfer year: if the cost of the new asset is less than the capital gains, only the difference is charged to tax under Section 67; if the cost of the new asset equals or exceeds the gains, no capital gains are charged to tax.

If the new asset is itself transferred within three years of being purchased, acquired, constructed or transferred, its cost for computing any capital gain on that later transfer is treated as nil (where no gains were originally charged) or reduced by the amount of the earlier gains (where some gains were charged).

Depositing unutilised money before the return due date

If the capital gains are not used for the new asset within one year before the transfer, or before filing the return of income under Section 263, the unutilised amount must be deposited in a specified bank or institution under a Central Government-notified scheme, before filing the return and no later than its due date, with proof of deposit submitted along with the return. The amount already spent, plus the deposited amount, is together treated as the cost of the new asset.

If the deposited amount is not fully used within the time limit, the unutilised amount is charged to tax as income of the tax year in which three years from the date of transfer expires, though the taxpayer may withdraw the unutilised amount under the notified scheme.

What counts as "urban area"

"Urban area" means any area within the limits of a municipal corporation or municipality that the Central Government declares to be an urban area for this section, having regard to population, concentration of industries, and the need for proper planning of the area and other relevant factors.

Frequently asked questions

What kind of capital gains does Section 87 exempt?

Gains from transferring machinery, plant, building, land, or rights in building or land, used for an industrial undertaking's business, arising because the undertaking is shifting out of an urban area.

How much time do I have to set up at the new location?

One year before, or up to three years after, the date of transfer of the original assets in the urban area.

What if I sell the new machinery or building soon after acquiring it?

If the new asset is transferred within three years of being purchased, acquired, constructed or transferred, its cost for computing any capital gain on that transfer is treated as nil, or reduced by the amount of gains earlier not charged to tax, depending on how the original exemption was computed.