Section 54F vs Section 86: Long-Term Capital Gains Exemption Remains Substantively Unchanged

Background

With the proposed shift from the Income-tax Act, 1961 to the Income Tax Bill, 2025, many provisions have been renumbered and redrafted for simplicity. A key area of interest is the exemption for long-term capital gains on reinvestment in residential property, earlier contained in Section 54F and now housed in Section 86 of the Bill.

There is a common concern among assessees and professionals that this renumbering may have altered the scope or conditions of the exemption. A close comparison of Section 54F under the Income-tax Act, 1961 and Section 86 of the Income Tax Bill, 2025 shows that, in substance, the exemption mechanism is preserved. The primary modifications are stylistic and structural rather than changes in tax policy or computation.

Core Objective of the Provision

Under both Section 54F and Section 86, the legislative intent remains consistent:

  • Where an Individual or HUF derives long-term capital gains from transferring a long-term capital asset other than a residential house,
  • Such gains can be exempt, wholly or proportionately,
  • To the extent that the net consideration is invested in one residential house property situated in India,
  • Subject to specified timelines, ownership conditions, and monetary caps.

Thus, the objective of encouraging reinvestment of long-term capital gains into residential housing in India continues unchanged in the new Bill.

Comparative Overview: Section 54F vs Section 86

The following conceptual comparison brings out the position under the existing law and the Bill, and highlights whether there is any real change in substance:

Eligible Assessee

  • Earlier law – Section 54F:

    • Relief is confined to Individual and Hindu Undivided Family (HUF) assessees.

  • New Bill – Section 86:

    • The exemption is again restricted to Individual and HUF assessees.

  • Substantive impact:

    • No expansion or contraction in the category of eligible assessees. Companies, firms, and other entities continue to remain outside the ambit of this particular exemption.

Nature of Original Asset Transferred

  • Earlier law – Section 54F:

    • The exemption applies where the original asset is any long-term capital asset other than a residential house.

  • New Bill – Section 86:

    • The same condition persists—capital gains must arise from a long-term capital asset which is not a residential house.

  • Substantive impact:

    • The character of the qualifying original asset remains identical. There is no revision that would permit long-term capital gains from sale of a residential house to be covered here (those remain covered under other specific sections).

Eligible Investment – New Asset

  • Earlier law – Section 54F:

    • Investment has to be made in one residential house property in India.

  • New Bill – Section 86:

    • The reinvestment requirement is again into one residential house situated in India.

  • Substantive impact:

    • No change in:
      • The type of new asset (residential house), or
      • The geographical limitation (must be in India).

Time Limits for Purchase and Construction

  • Purchase of new residential house:

    • Earlier law – Section 54F:
      • Purchase allowed within one year before or within two years after the date of transfer of the original asset.
    • New Bill – Section 86:
      • Retains the same one-year prior and two-year subsequent purchase window.

  • Construction of new residential house:

    • Earlier law – Section 54F:
      • Construction must be completed within three years from the date of transfer.
    • New Bill – Section 86:
      • Continues to provide a three-year period for construction.