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Quick Snapshot: Understand This in 2 Minutes
Section 82 says: sold a house, buy a house. Section 86 goes further: sold anything (gold, shares, land, mutual funds, a painting), buy a house. Still exempt.
But Section 86 works differently. It is proportionate. If you invest only half the sale proceeds in a house, you get exemption on only half the capital gain.
Here is the mental model. Imagine you got Rs. 50 lakh from selling gold. You invest Rs. 40 lakh of it in a house. You invested 80% of the proceeds. So 80% of your capital gain is exempt. The remaining 20% is taxable.
| Parameter | Details |
| Who can claim | Individual or HUF only |
| Asset sold | Any long-term capital asset OTHER than a residential house |
| Reinvest in | 1 new residential house in India |
| Purchase deadline | 1 year before or 2 years after the date of sale |
| Construction deadline | 3 years after the date of sale |
| Exemption formula | (Cost of new house / Net sale consideration) x Capital gain |
| Cap on new house cost | Rs. 10 crore (excess not counted) |
| House ownership restriction | Must not own more than 1 other house at the time of sale |
| Old section | Section 54F of the Income Tax Act 1961 |
The Proportionate Exemption Formula
Section 86 does not give a flat exemption. The exemption depends on what fraction of the net sale consideration you invest in the new house.
| Situation | Exemption |
| Cost of new house is equal to or more than net sale consideration | Entire capital gain is exempt |
| Cost of new house is less than net sale consideration | Exempt gain = (Cost of new house / Net sale consideration) x Capital gain |
What Is Net Sale Consideration? (Section 86(10))
Net sale consideration = Full sale price received minus expenses incurred exclusively in connection with the transfer (such as brokerage, legal fees, registration expenses related to the transfer).
Example 1: Partial Investment
Priya sells gold jewellery. Net sale consideration = Rs. 50 lakh. LTCG = Rs. 20 lakh. She buys a flat for Rs. 40 lakh. Exempt = (40/50) x 20 = Rs. 16 lakh. Taxable LTCG = Rs. 4 lakh.
Example 2: Full Investment
Arun sells shares. Net consideration = Rs. 80 lakh. LTCG = Rs. 30 lakh. He invests Rs. 80 lakh in a house. Since investment equals net consideration, the entire Rs. 30 lakh gain is exempt. Tax = Rs. 0.
The Rs. 10 Crore Cap (Sections 86(8) and 86(9))
Just like Section 82, Section 86 also has a Rs. 10 crore ceiling introduced by the Finance Act 2023.
- Section 86(8): If the cost of the new house exceeds Rs. 10 crore, the excess above Rs. 10 crore is ignored for computing the exemption.
- Section 86(9): If the net sale consideration on the original asset exceeds Rs. 10 crore, the excess above Rs. 10 crore is not considered for CGAS deposit purposes.
The House Ownership Restriction (Section 86(5))
You cannot claim Section 86 if on the date of sale of the original asset you already own more than one residential house (excluding the new house being purchased).
Additionally, you lose the exemption if:
- You purchase another residential house (other than the new one) within 1 year of the original sale, where income from that house is taxable.
- You construct another residential house (other than the new one) within 3 years of the original sale, where income from that house is taxable.
Practical Tip
If you own exactly one house already and sell gold to buy a second house, Section 86 applies. But if you own two houses already on the date of gold sale, you are disqualified. Count your houses before you claim.
Withdrawal Conditions
The exemption is reversed in two situations:
- Section 86(7): You sell the new house within 3 years of purchase or construction. The exempt gain becomes taxable LTCG in the year of sale.
- Section 86(6): You buy another house within 2 years or construct another house within 3 years of the original sale (other than the new exempt house). The earlier exemption becomes taxable LTCG in that year.
CGAS for Section 86
If you have not bought the new house by the ITR filing date, deposit the unused portion of the net sale consideration (proportionate to the claim) in CGAS before filing. The deposit secures the exemption until you find and buy the new house.
Adjacent Flats Rule
Two adjacent flats purchased together and combined as a single unit are treated as one residential house for Section 86 purposes.
Practical Compliance Checklist
- Selling shares, gold, mutual funds, or any asset that is NOT a house? Section 86 is your route to exemption.
- Count how many houses you own before the sale. If you own two or more, you cannot claim Section 86.
- Calculate net sale consideration carefully. Subtract genuine transfer-related expenses from the sale price.
- Invest as large a portion of the net consideration as possible. Exemption is proportionate to investment.
- Do not invest more than Rs. 10 crore in the new house expecting full exemption on the excess. Cap applies.
- After claiming exemption, do not buy another house for 2 years or build one for 3 years. That reverses the exemption.
- Do not sell the new house within 3 years. Exemption is reversed.
Section 86 is the most versatile capital gains exemption because it applies to any long-term asset you sell. The proportionate formula is fair: invest more, save more tax. The house ownership restriction and the post-sale restrictions require careful planning. If you do it right, selling gold and buying a house can be entirely tax-free.
