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Quick Snapshot: Understand This in 2 Minutes
Cities are congested. Governments want industries to shift to smaller towns and rural areas. Section 87 uses tax policy to push this goal.
If you own a factory in a city and decide to shift it to a non-urban area, you will sell your urban factory’s assets: the land, building, machinery. Those sales create capital gains. Section 87 says: if you invest those gains in the new location within 3 years, no capital gains tax.
Think of it as a relocation incentive from the government. You shift. We waive the tax.
| Parameter | Details |
| Who can claim | Any person (individual, company, firm, etc.) |
| Assets sold | Machinery, plant, building, land, or rights in building/land of an urban industrial unit |
| Type of gain | Both short-term and long-term capital gains |
| Reinvest in | New plant and machinery, building, land in the non-urban area; shifting and establishment expenses |
| Time limit | 1 year before OR 3 years after the date of sale |
| Cap | No cap. Lower of: capital gain or reinvestment |
| Old section | Section 54G of the Income Tax Act 1961 |
What Is an Urban Area? (Section 87(5))
Urban area under this section means any area within the limits of a municipal corporation or municipality that the Central Government declares as an urban area for this section. The declaration takes into account:
- Population density.
- Concentration of industries.
- Need for proper planning and development.
If your factory is in such a notified urban area, the section applies when you shift to a non-urban location.
What Qualifies as Reinvestment?
You must use the capital gain proceeds within 1 year before or 3 years after the sale for:
- Purchasing new machinery or plant for use in the new non-urban business location.
- Acquiring land or building, or constructing a building, for the new location.
- Shifting the original asset and the industrial establishment to the new area.
- Any other purpose specified in a government-notified scheme for this section.
Importantly, shifting expenses also count. So the transport and relocation costs you pay are part of the qualifying reinvestment.
How Much Exemption Do You Get?
The exemption is the lower of:
(a) the capital gain, or
(b) the total cost and expenses incurred on the qualifying reinvestment.
Example 1: Full Exemption
A manufacturer shifts its urban factory to a rural industrial area. LTCG on sale of old factory land and building = Rs. 1 crore. Total spend on new land, new machinery, and shifting expenses within 3 years = Rs. 1.2 crore. Since Rs. 1.2 crore exceeds Rs. 1 crore, the entire Rs. 1 crore is exempt.
Example 2: Partial Exemption
A company shifts its urban unit. Capital gain = Rs. 80 lakh. Total reinvestment in new plant, land, and shifting = Rs. 60 lakh. Exemption = Rs. 60 lakh. Taxable capital gain = Rs. 20 lakh.
Lock-In and Withdrawal
If the new asset is transferred within 3 years of its purchase or construction:
- If the gain was fully exempt: the cost of acquisition of the new asset for the purpose of computing capital gains on its sale is treated as nil.
- If the gain was partially exempt: the cost is reduced by the exempted capital gain.
This effectively ensures that the deferred tax is paid when the new asset is eventually sold within the lock-in.
CGAS for Section 87
If the total reinvestment is not complete by the ITR filing date, deposit the unused portion of the capital gain in CGAS before filing. You have 3 years from the date of sale to complete the reinvestment.
Practical Compliance Checklist
- Planning to shift your urban factory? Confirm the current factory location is in a notified urban area under Section 87.
- Keep separate records of each qualifying expense: new land purchase, machinery purchase, construction, shifting costs. These form the reinvestment amount.
- The 1-year-before window is useful. If you have already bought land in the new area before selling the old assets, that cost counts.
- Do not mix personal expenses with shifting costs. Only business-related reinvestment qualifies.
- Deposit unused gains in CGAS before filing ITR if reinvestment is incomplete.
- Avoid transferring the new assets within 3 years. If you do, the cost basis reduces and your capital gain on the new asset rises.
Section 87 is a policy-driven exemption. The government wants industries out of crowded urban centres. In return, it gives you a tax-free exit from the city. If you are planning a factory relocation, this section can make the entire capital gain from the urban asset sale tax-free. The key is to plan the reinvestment properly and document every single qualifying expense.
