Capital Gain Bonds Exemption (NHAI, REC) under the Income Tax Act 2025: Section 85 Explained
Under section 85 of the Income-tax Act, 2025, long-term capital gains from selling land or a building (or both) are not charged to tax to the extent you invest them in a "long-term specified asset", meaning an NHAI or REC bond, within six months of the sale. The investment that counts is capped at Rs 50 lakh, and the bond must be kept for five years, or the exempted gain comes back into your income.
This guide covers who can use it, how the Rs 50 lakh cap works across two tax years, what breaks the exemption, and three worked examples. Every figure comes from section 85 of the Act as amended by the Finance Act, 2026. Last reviewed on 10 November 2026.
What is the capital gain bonds exemption under section 85?
Section 85 is a relief for people who sell land or a building at a long-term gain. Instead of the gain being charged under section 67 (the main capital gains charging section), you can park the gain in specified bonds. The part of the gain you invest is not charged under section 67. The part you do not invest is.
Section 85(1) has two limbs. You must have (a) a long-term capital gain from the transfer of land or building, or both (the "original asset"), and (b) invested the whole or part of that gain in a long-term specified asset (the "new asset") within six months after the date of transfer.
Only the capital gain needs to be invested, not the full sale price. Gains from other assets, such as shares or gold, do not qualify under this section.
Which bonds are a "long-term specified asset"?
Section 85(6) defines it as a bond that is both redeemable after five years and issued on or after 1 April 2018, and issued by one of these:
- the National Highways Authority of India (NHAI);
- Rural Electrification Corporation Limited (REC); or
- any other bond the Central Government notifies for the purposes of section 85.
Check the issue date and the redemption term of the bond before you buy. A bond that is redeemable in less than five years, or was issued before 1 April 2018, does not meet the definition.
How much can you invest, and what is the Rs 50 lakh cap?
Section 85(2) limits the investment in specified bonds, made out of gains from one or more original assets, to Rs 50 lakh. The cap applies either:
- during any one tax year; or
- in the year of transfer of the original asset or assets and the next tax year, taken together.
In plain terms, if you sell in February and invest part before 31 March and part after 1 April, the total across those two tax years is capped at Rs 50 lakh. If your gain is Rs 70 lakh, at most Rs 50 lakh of it can go into bonds, and the remaining Rs 20 lakh is charged under section 67.
Who can claim it, and can gains from several properties go into one bond?
Section 85(1) applies to "an assessee" who has the long-term gain. It does not limit the benefit to individuals, and the text sets no condition on residential status. What it does require is the type of asset sold: land or building, or both. Gains from shares, gold or a business undertaking are outside it.
Section 85(2) refers to gain arising from the transfer of "one or more original asset", so gains from two plots sold in the same year can be put into the same bonds. The Rs 50 lakh cap is then shared across all of them, not given afresh for each property.
Section 85(1)(b) speaks only of investing in a long-term specified asset within six months. It does not mention parking the money in any other scheme, so a deposit elsewhere does not meet the condition.
What is the six-month window? A timeline
How do you work out the exempt and taxable gain? Two worked examples
Both examples use tax year 2026-27 and assume the gain is a long-term capital gain from land, already computed. This article does not cover how the gain itself is computed.
| Example 1: Ravi, gain larger than investment | Example 2: Meena, investment larger than gain | |
|---|---|---|
| Long-term gain on land | Rs 80,00,000 | Rs 35,00,000 |
| Invested in NHAI bonds within 6 months | Rs 50,00,000 | Rs 40,00,000 |
| Investment that counts (capped at Rs 50 lakh, section 85(2)) | Rs 50,00,000 | Rs 40,00,000 |
| Which limb applies | Gain exceeds investment, section 85(1)(i) | Gain is equal to or less than investment, section 85(1)(ii) |
| Not charged under section 67 | Rs 50,00,000 | Rs 35,00,000 (whole gain) |
| Charged under section 67 | 80,00,000 - 50,00,000 = Rs 30,00,000 | Nil |
In Example 2, the extra Rs 5 lakh invested above the gain earns no further benefit. The exemption can never exceed the gain itself.
Example 3: the cap across two tax years
Meena's neighbour Suresh sells a plot on 20 February 2027 (tax year 2026-27) with a long-term gain of Rs 70,00,000. He buys NHAI bonds worth Rs 30,00,000 in March 2027 and another Rs 30,00,000 in June 2027 (tax year 2027-28). Both purchases fall within six months of the sale.
| Step | Amount |
|---|---|
| Total invested in the year of transfer and the next year | 30,00,000 + 30,00,000 = Rs 60,00,000 |
| Investment that counts under section 85(2) | Rs 50,00,000 (cap) |
| Gain exceeds the counted investment, so section 85(1)(i) applies | 70,00,000 - 50,00,000 = Rs 20,00,000 charged under section 67 |
| Not charged under section 67 | Rs 50,00,000 |
The extra Rs 10 lakh he bought is not wasted as an investment, but it does not shelter any gain under section 85.
What happens if you sell the bond or borrow against it?
The exemption depends on you holding the bond. Under section 85(3), if the new asset is transferred or converted (otherwise than by transfer) into money within five years of its acquisition, the gain that was not charged earlier is treated as long-term capital gains of the tax year in which the transfer or conversion happens.
Section 85(4) closes a common workaround: any loan or advance taken on the security of the bond is deemed to convert it into money on the date of the loan or advance. So pledging the bond for an overdraft or loan counts.
Real-life example: the loan against the bond
Ravi (Example 1) buys the Rs 50 lakh of bonds on 1 January 2027 and keeps them. In March 2029, short of cash, he takes a loan against the bonds. Under section 85(4) the bond is deemed converted into money on that date, within five years of acquisition. The Rs 50,00,000 that was not charged in tax year 2026-27 becomes long-term capital gains income of tax year 2028-29, the year of the loan. If he had waited past 1 January 2032, section 85(3) would not apply.
Section 85(3) bites only on a transfer or conversion within five years of acquisition. The bond is defined as one redeemable after five years, so redemption at maturity does not trigger it. The five years run from the date you acquire the bond, not from the date you sold the property.
Can you also claim the section 123 deduction on the same bond?
No. Section 85(5) says that where the investment has been taken into account for section 85(1), no deduction under section 123 is allowed for that investment for any tax year. Section 123 gives individuals and HUFs a deduction of up to Rs 1,50,000 for the payments listed in Schedule XV. You cannot count the same money twice.
Real-life example: partial investment
Meena sells an old shop building on 5 September 2026 at a long-term gain of Rs 18,00,000. She is unsure about locking money for five years, so she buys REC bonds for Rs 8,00,000 on 20 November 2026, within six months. Rs 8,00,000 of the gain is not charged under section 67. The remaining 18,00,000 - 8,00,000 = Rs 10,00,000 is charged under section 67 in tax year 2026-27. Section 85 allows part-investment, so she does not lose the exemption on the portion she did invest.
Quick reference
| Item | Rule | Provision |
|---|---|---|
| Eligible original asset | Land or building, or both, long-term capital gain | Section 85(1)(a) |
| Investment window | Within six months after the date of transfer | Section 85(1)(b) |
| Bond issuers | NHAI, REC, or any other bond notified by the Central Government | Section 85(6) |
| Bond terms | Redeemable after five years, issued on or after 1 April 2018 | Section 85(6) |
| Maximum investment | Rs 50 lakh in a tax year, or in the year of transfer plus the next tax year | Section 85(2) |
| Lock-in | Five years from acquisition of the bond | Section 85(3) |
| Loan against the bond | Treated as conversion into money on the loan date | Section 85(4) |
| Section 123 deduction on the same investment | Not allowed | Section 85(5) |
What are the common mistakes with capital gain bonds?
- Counting the sale price instead of the gain. Only the long-term capital gain is eligible for exemption, not the whole sale consideration.
- Missing the six-month window. The window runs from the date of transfer. Investing a day late means the investment does not qualify.
- Investing more than Rs 50 lakh and expecting more relief. The cap in section 85(2) applies across the year of transfer and the next year combined.
- Using it for non-land gains. Section 85 applies only to long-term gains from land or building.
- Taking a loan against the bond. Even without selling, a loan or advance on its security ends the exemption under section 85(4).
- Buying a bond that does not meet the definition. Verify the issuer, the issue date on or after 1 April 2018, and the redemption term of more than five years.
How do CA firms track bond lock-ins for clients?
The hard part for a practitioner is the follow-up. The six-month deadline and the five-year lock-in are separate dates for each client and each bond, and the 2029 or 2032 reminder is easy to lose. Finexo's practice management software lets a CA firm record such dates against each client and get reminded before they pass. It does not compute capital gains or file returns for you.
For the wider context on how gains are classified, see our guide on capital gains under the 2025 Act.
Where is this in the Act?
- Section 85(1): exemption for gains invested in a long-term specified asset within six months
- Section 85(2): Rs 50 lakh investment cap
- Section 85(3) and (4): five-year lock-in, and loan or advance treated as conversion into money
- Section 85(5): no section 123 deduction for the same investment
- Section 85(6): definition of long-term specified asset
- Section 67: the charging section for capital gains
- Section 123: deduction for life insurance premia, provident fund and similar payments (Schedule XV)
This article explains section 85 of the Income-tax Act, 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. It does not map section 85 to any old-law section. Confirm the position for a specific case with a qualified chartered accountant.
Frequently Asked Questions
Which gains qualify for the capital gain bonds exemption under section 85?
Only long-term capital gains from the transfer of land or building, or both. Gains from shares, gold or other assets do not qualify under section 85.
Which bonds can I invest in under section 85 of the Income-tax Act, 2025?
Bonds issued by NHAI or REC that are redeemable after five years and issued on or after 1 April 2018, or any other bond notified by the Central Government for this section (section 85(6)).
How much can I invest in capital gain bonds?
Up to Rs 50 lakh, either in any one tax year, or in the year of transfer and the next tax year taken together (section 85(2)). Gain above what you invest, or above the cap, is charged under section 67.
How long must I hold the bonds?
Five years from acquisition. If the bond is transferred or converted into money within five years, the exempted gain is treated as long-term capital gains of that year (section 85(3)).
Does taking a loan against the bond affect the exemption?
Yes. Under section 85(4), a loan or advance taken on the security of the bond is deemed to convert it into money on that date, which triggers section 85(3) if it falls within five years.
Can I claim the section 123 deduction on the same bond investment?
No. Where the investment has been taken into account for the section 85(1) exemption, section 85(5) denies a section 123 deduction for that investment.
Who can claim the section 85 exemption?
Any assessee with a long-term capital gain from land or building. Section 85(1) does not limit it to individuals or to residents; the condition is the type of asset sold and the investment in a specified bond.
Can gains from two properties be invested in the same bonds?
Yes. Section 85(2) covers gain from one or more original assets, but the Rs 50 lakh investment cap is shared across all of them.