List Your Land
It has recently been reported that the new Section 86 rules that came in with the Income-tax Act, 2025, and the headline has got a lot of landowners asking whether they can finally sell a plot and escape the tax by putting the money into a house. The answer is yes, in many cases, but the relief is not brand new. Section 86 is the old Section 54F under a new number, and it works for people who have farmland for sell or any other long-term asset that is not a residential house. This guide explains who qualifies, how the exemption is worked out, and what a seller should do before signing a deal.
What Section 86 of the Income-tax Act, 2025 Actually Says?
Income-tax Act, 2025 replaced the Act of 1961 on 1 April 2026. There was a change in the numbering of some sections during this replacement process, where the reinvestment exemption referred to as Section 54F is now Section 86. Comparing both acts by tax experts reveals that the conditions are nearly alike. Some of the language has been polished, and the term "tax year" has replaced the previous term "previous year," but the meaning remains the same; that is, when a long-term capital asset, except residential property, is sold and the net sale proceeds are invested in a residential house in India, the capital gain would be exempted completely or partially.
This applies to any person buying or selling land because land is among the top most long-term assets that a person may own before disposing of them. An example of such users of this section would be a family who inherits a piece of land and decides to live in an urban apartment.
| Point | Old law | New law (from 1 April 2026) |
|---|---|---|
| Section number | 54F, Income-tax Act 1961 | 86, Income-tax Act 2025 |
| Charging section for capital gains | 45 | 67 |
| Who can claim | Individual or HUF | Individual or HUF |
| Substantive change | None | None, only renumbering and simpler drafting |
Who Can Claim the Relief?
Only an individual or a Hindu Undivided Family can use Section 86. Companies and firms are left out. Beyond that, a few conditions apply:
- The asset sold must be a long-term capital asset. For land, that means you held it for more than 24 months.
- The asset sold cannot be a residential house. Plots, shops, shares, gold, and agricultural land that count as a capital asset all qualify.
- You should not own more than one residential house, other than the new one, on the date the land is transferred.
- The new house must be in India.
That third condition trips up a lot of sellers. If you already own two flats when you sell the land, Section 86 is off the table, even if the new house is perfectly eligible.
Is Agricultural Land a Capital Asset
Not every piece of farmland is treated the same way. Rural agricultural land, which sits beyond the distance limits set around municipalities of specified population, is not a capital asset at all, so its sale does not attract capital gains tax and there is nothing to exempt. Agricultural land inside a municipality, or within the notified distance from one, is a capital asset, and its sale is taxable. That second type is where Section 86 becomes useful.
So before anyone thinks about agriculture land for purchase or sale, the first check is the location of the plot with respect to the nearest municipal limit. A village parcel and a parcel on the edge of a growing town can be taxed very differently, even if they look the same on the ground. Your chartered accountant can confirm this from the population figures and the aerial distance rules.
How the Exemption Is Calculated
The relief is proportionate to the amount you reinvest. The usual formula is capital gain multiplied by the amount invested in the new house, divided by the net sale consideration. If you invest the full net amount, the whole gain is exempt. If you invest less, only a part is exempt.
| Detail | Amount |
|---|---|
| Net sale consideration of land | ₹1.5 crore |
| Long-term capital gain | ₹90 lakh |
| Invested in new residential house | ₹1 crore |
| Exempt gain (₹90 lakh × ₹1 crore ÷ ₹1.5 crore) | ₹60 lakh |
| Taxable gain | ₹30 lakh |
At the present long-term rate of 12.5% on land, that taxable ₹30 lakh would carry roughly ₹3.75 lakh in tax before surcharge and cess. Had the seller put the full ₹1.5 crore into the house, the tax on this deal would have been nil. There is also a ceiling: the cost of the new house considered for the exemption is capped at ₹10 crore.
Timelines You Cannot Miss
The dates in Section 86 are strict, and most disputes with the tax department begin here.
- Buy the new house up to one year before the land is sold, or up to two years after.
- If you plan to build instead, the construction has to be completed within three years of the sale date.
- If the money is not spent by the time you file your return, deposit the unused part in a Capital Gains Account Scheme account with a public sector bank before the filing due date, and then withdraw it for the purchase or construction.
- Keep the new house for at least three years. A sale inside that window brings the exempted gain back into your income for that year.
- Do not buy or build a second residential house within the two- and three-year windows. That, too, reverses the relief.
A good habit is to keep a single folder with the sale deed, bank entries, the builder agreement or construction bills, and the deposit slip. When a notice comes, everything is in one place.
Where Sellers Go Wrong?
The majority of errors arise out of haste. Typically, the seller receives money, spends it somewhere else, and then, when contacting an expert, realizes that the year is almost half done. Others put money into a regular deposit account and lose the tax-free advantage with regard to the excess money.
A second frequent error is considering the tax exemption automatic. It needs to be claimed in the return, accompanied by a special schedule and additional documentation. Ignoring the rules for the second residential property is another one. Particularly, it is easy to overlook this rule when parents purchase an apartment for their kids within the same period.
Land selling requires preparing additional documents that have nothing in common with tax at all, e.g., mutations, title clearance, and boundary documents. Getting a deal fall-through after making plans of investment in the new property leaves a person in a situation where he needs to pay tax but still has an unsold plot.
Section 86 Compared With Other Reinvestment Routes
Section 86 is not the only way to protect a gain. The right choice depends on what you sold and where you want the money to go.
| Route | What you sell | Where the money goes | Key limit |
|---|---|---|---|
| Section 86 (old 54F) | Any long-term asset except a house | One residential house in India | ₹10 crore cap, 3-year lock-in |
| Section 82 (old 54) | A residential house | Another residential house | Applies only to house sales |
| Section 85 (old 54EC) | Land or building | Specified bonds | Investment limit and 5-year lock-in |
| Old Section 54B route | Agricultural land used for farming | Other agricultural land | Land must have been used for farming; check its current number in the new Act |
For a farmer who wants to stay in agriculture, the farmland route is often a better fit. For someone who wants a home, Section 86 is the practical option.
How 2Bigha Helps Land Sellers and Buyers?
Tax planning is one part of the process. The second part involves looking for the right buyer or the right piece of land, and here 2Bigha comes into play. This is an online platform for farmland where the owner will be able to sell their piece of land, and the buyer will have the choice of buying farm land by area and price. For sellers who find it convenient to sell online, this gives them more exposure than just having one broker.
For buyers, there is the Background Verification Report and the Land Report, which do the record check prior to any transaction. Also, you have the Book a Visit button to view the parcel in person. For sellers planning under Section 86, this verified listing will help you close the deal in your reinvestment period instead of keeping it pending for months.
Disclaimer: This article is for informational purposes only and should not be considered investment, legal, financial, or property advice. Real estate regulations, infrastructure plans, market conditions, and government policies may change over time. Readers are advised to verify information with relevant authorities and consult qualified professionals before making any investment or property-related decisions.
