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Quick Snapshot
All other capital gains exemption sections require you to buy a new asset. Buy a house. Buy new agricultural land. Build a new factory. Section 85 is different.
Here, you just invest the capital gain in bonds issued by NHAI or REC. That is it. No property. No construction. No shifting of business. Just buy bonds within 6 months of selling your land or building, and the capital gain is tax-free.
Think of it as a parking space. You sold property. You are not ready to buy new property. Park the gain in bonds for 5 years. Pay no tax. After 5 years, the bonds mature and you get your money back.
| Parameter | Details |
| Who can claim | Any person (individual, HUF, company, firm, trust, etc.) |
| Asset sold | Land or building only (long-term capital asset) |
| Type of gain covered | Long-term capital gains only |
| Invest in | NHAI bonds or REC bonds (redeemable after 5 years) |
| Time limit | Within 6 months from the date of sale |
| Annual cap | Rs. 50 lakh per Tax Year (also Rs. 50 lakh combined across year of sale and next year) |
| Lock-in | 5 years from date of investment in bonds |
| Old section | Section 54EC of the Income Tax Act 1961 |
What Are the Specified Bonds? (Section 85(6))
The law defines these as long-term specified assets. As of now, the eligible bonds are:
- Bonds issued by the National Highways Authority of India (NHAI) constituted under the NHAI Act, 1988.
- Bonds issued by Rural Electrification Corporation Limited (REC) registered under the Companies Act, 2013.
- Any other bond notified by the Central Government.
These bonds must be redeemable after 5 years and must have been issued on or after 1 April 2018.
The Rs. 50 Lakh Cap: How It Works
This is the most important limit to understand. Section 85 imposes two simultaneous caps:
| Cap Type | Limit |
| Investment in the Tax Year of transfer (Section 85(2)(a)) | Rs. 50 lakh maximum |
| Combined investment across Tax Year of transfer AND subsequent Tax Year (Section 85(2)(b)) | Rs. 50 lakh maximum in total |
Both limits apply simultaneously. You cannot invest Rs. 50 lakh in Year 1 and then another Rs. 50 lakh in Year 2 if both investments relate to the same sale transaction.
Example 1: Simple Case
Ravi sells a plot. Long-term capital gain = Rs. 45 lakh. He invests Rs. 45 lakh in NHAI bonds within 6 months. Entire Rs. 45 lakh is exempt. Tax = Rs. 0.
Example 2: Cap in Action
Anita sells two plots in the same Tax Year. Combined LTCG = Rs. 80 lakh. She can invest only Rs. 50 lakh in bonds (the annual cap). Exemption = Rs. 50 lakh. Taxable LTCG = Rs. 30 lakh.
Example 3: Cross-Year Investment
Vijay sells a property in January 2026. LTCG = Rs. 60 lakh. He invests Rs. 30 lakh in NHAI bonds in March 2026 (Tax Year 2025-26). He wants to invest the remaining Rs. 30 lakh in April 2026 (Tax Year 2026-27). Wait: the combined cap across both years is Rs. 50 lakh. So he can invest only Rs. 20 lakh more in 2026-27. Total exemption = Rs. 50 lakh. Taxable = Rs. 10 lakh.
No Section 80C Deduction on These Bonds (Section 85(5))
You cannot claim a deduction under Section 123 (the equivalent of old Section 80C) on the investment in these bonds. The exemption under Section 85 and the 80C deduction are mutually exclusive for this investment.
No CGAS for Section 85
Unlike all other capital gains sections, Section 85 has no CGAS mechanism. There is no parking option. The bond investment must happen within 6 months from the date of transfer. Period.
The Lock-In: What Happens If You Sell or Pledge the Bonds?
| Action | Tax Consequence |
| Sell or transfer bonds within 5 years (Section 85(3)) | Capital gain exempt earlier becomes taxable as LTCG in the year of transfer |
| Take a loan against bonds within 5 years (Section 85(4)) | Treated as conversion into money on the date of loan. LTCG triggered in that year. |
Example 4: Loan Trap
Ravi invested Rs. 45 lakh in NHAI bonds and claimed exemption. Two years later, he takes a loan against these bonds. The entire Rs. 45 lakh becomes taxable as LTCG in the year he took the loan. The exemption is gone.
Practical Compliance Checklist
- Sold land or building with long-term capital gain? Section 85 is available to any person, not just individuals.
- Act fast. You have only 6 months from the sale date to invest. No CGAS option. No extension. Mark the deadline immediately.
- Check whether your gain exceeds Rs. 50 lakh. If yes, only Rs. 50 lakh can be saved through this route. Plan other strategies for the balance.
- Do not take any loan against the bonds for 5 years. Do not transfer or sell the bonds either. Either action wipes out the exemption.
- Do not claim Section 80C on the same investment. It is not allowed.
- If you sold multiple properties in one year, remember the Rs. 50 lakh combined cap applies across all those sales.
Section 85 is the easiest exemption to execute because it needs no property purchase. You just buy bonds. But the 6-month deadline is strict, the Rs. 50 lakh cap is hard, and the 5-year lock-in is non-negotiable. Use this section when you want liquidity flexibility but do not wish to commit to a new property immediately. Just remember: once you invest, those bonds must stay untouched for 5 years.
