Chapter IV - Computation of Total Income
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.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) If the assessee has–– (a) capital gains arising from the transfer of capital asset, being machinery or plant or building or land or any rights in building or land used for the business of an industrial undertaking situated in an urban area, effected in the case of shifting of an industrial undertaking situated in an urban area (original asset) to any area [other than an urban area (new area)]; and (b) within one year before or three years after the date of such transfer,— (i) purchased new machinery or plant for business of the industrial undertaking in the new area; (ii) acquired building or land or constructed building for his business in the said area; (iii) shifted the original asset and transferred the establishment of such undertaking to such area; and (iv) incurred expenses on such other purpose as specified in a scheme notified by the Central Government for this section, then, instead of the capital gains being charged to income-tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:— (A) if the cost and expenses incurred on all or any of the purposes mentioned in sub-clauses (i) to (iv) referred to as “new asset”,–– (I) is less than the capital gains, the difference shall be charged under section 67 as the income of the tax year; or (II) is equal to or more than the capital gain, no capital gain shall be charged under section 67; and (B) for computing any capital gain arising from transfer of the new asset within three years of its being purchased, acquired, constructed or transferred, the cost shall be nil in case of sub-clause(A)(II) or shall be reduced by the amount of the capital gain in case of sub-clause (A)(I).
(2) If the capital gain is not used by the assessee for the new asset within one year before the date of transfer of the original asset, or before filing the return of income under section 263, then–– (a) the unutilised amount shall be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government; (b) such deposit shall be made before the filing of the return and not later than the due date applicable in the case of the assessee for filing the return of income under section 263(1); and (c) the proof of deposit shall be submitted along with such return.
(3) For the purposes of sub-section (1), the amount already utilised for purchasing or constructing the new asset together with the deposited amount under sub-section (2) shall be deemed to be the cost of the new asset.
(4) If the amount deposited under sub-section (2) is not wholly or partly utilised for the new asset within the period specified in sub-section (1), then,— (a) the unutilised amount shall be charged under section 67 as the income of the tax year in which the period of three years from the date of the transfer of the original asset expires; and (b) the assessee shall be entitled to withdraw such unutilised amount in accordance with the scheme referred to in sub-section (2).
(5) For the purposes of this section, the expression “urban area” means any area within the limits of a municipal corporation or municipality, declared to be an urban area by the Central Government for the purposes of this section, having regard to–– (a) the population; (b) concentration of industries; and (c) need for proper planning of the area and other relevant factors.
Introduction
An industrial undertaking moving from a notified urban area to another non-urban area can defer gains on eligible assets used in its business. The provision links relief to spending on plant, premises, relocation and notified scheme purposes.
Key takeaways
Move out of urban area
Capital gains on specified assets of an industrial undertaking shifted from a notified urban area may be relieved through qualifying machinery, land, building and relocation expenditure in the statutory window.
Reinvestment and deposit
The relief depends on the gain spent on the new assets; unspent gain requires a specified deposit by the return due date and later non-use is taxed.
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.
Step-by-step flow for applying Section 87
- 1
Was a capital asset of an industrial undertaking in an urban area transferred because the undertaking was shifted out of the urban area?
The asset must be machinery, plant, building, land or rights in building or land used for the business of the undertaking. "Urban area" means an area within a municipal corporation or municipality declared by the Central Government under Section 87(5).
- No: Section 87 does not apply.
- Yes: Go to the next step.
- 2
Within one year before or three years after the transfer, was money spent on the new area?
Qualifying purposes: new machinery or plant, land or building acquired or constructed, shifting the original asset and the establishment, and other expenses specified in the notified scheme. Together these are the "new asset".
- 3
Is any capital gain still unutilised before filing the return under Section 263?
- Yes: Deposit the unutilised amount in a specified bank or institution under the notified scheme, not later than the Section 263(1) due date, and attach proof of deposit to the return. Amount utilised plus deposit is deemed the cost of the new asset.
- No: Go to the next step.
- 4
Compare the cost of the new asset with the capital gain
- Cost is equal to or more than the gain: No capital gain is charged under Section 67.
- Cost is less than the gain: The difference is charged under Section 67.
- 5
Was any deposited amount left unused at the end of three years from the transfer?
Under Section 87(4) the unused amount is charged under Section 67 in the tax year in which the three-year period expires, and it may be withdrawn under the scheme. If the new asset is transferred within three years, its cost is taken as nil or reduced as Section 87(1)(B) provides.
Practical checklist
Do
- Verify the original industrial site met the notified urban-area definition and the new site is outside it.
- Track eligible expenditure made from one year before through three years after transfer and any required deposit of unutilised gain.
Avoid
- Do not count a move to an urban destination under this section; test Section 88 if it is an SEZ.
- Do not include unrelated relocation spending outside the listed or notified categories.
Illustrative example
Worked example: shifting a factory out of a city
Hypothetical facts (illustration only, not a real taxpayer): A company shifts its factory from a declared urban area to a non-urban area. Transfer of the old land and building produces a capital gain of ₹50,00,000. Before filing the return for that tax year it has spent ₹10,00,000 on new machinery. Within three years of the transfer it spends a further ₹32,00,000 on a new building and shifting costs.
Deposit before the return
Unutilised gain at the time of filing = ₹50,00,000 - ₹10,00,000 = ₹40,00,000. This is deposited in a specified bank or institution before the Section 263(1) due date, and proof is filed with the return.
Deemed cost of new asset
Under Section 87(3), ₹10,00,000 utilised + ₹40,00,000 deposited = ₹50,00,000, equal to the capital gain, so no capital gain is charged for the year of transfer.
Use of the deposit
Of the ₹40,00,000 deposit, ₹32,00,000 is used within three years. Unused balance = ₹40,00,000 - ₹32,00,000 = ₹8,00,000.
Outcome
- ₹8,00,000 is charged under Section 67 as income of the tax year in which three years from the transfer expire, and the company can withdraw it under the scheme.
- If the new machinery or building is sold within three years of acquisition, its cost for that later capital gain is taken as nil under Section 87(1)(B), because the cost of the new asset equals the capital gain.
Glossary
- Urban area
- An area declared by the Central Government for this section under its population, industry and planning criteria.
- New asset
- Qualifying plant, premises and relocation expenses in the new area for this rollover calculation.
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.
What happens if the deposited amount is not fully used within three years?
Under Section 87(4), the unused amount is charged under Section 67 as income of the tax year in which three years from the transfer of the original asset expire. The assessee may then withdraw it under the notified scheme.
Need help applying this provision to your situation?
Plan your industrial undertaking relocation with our tax teamLast updated 10 October 2026