Test the taking, the prior use and the replacement purpose
Section 84 of the Income-tax Act, 2025 can relieve capital gains when land, a building or a right in either, forming part of the taxpayer’s industrial undertaking, is transferred by statutory compulsory acquisition. The asset must have been used by that taxpayer in the undertaking’s business during the two years immediately before transfer. The replacement must serve shifting or re-establishing that undertaking or setting up another industrial undertaking. This guide addresses tax years beginning on or after 1 April 2026. For FY 2025–26 and its AY 2026–27 return, use the Income-tax Act, 1961, including section 54D where applicable. For cases that cross commencement, establish the applicable year and savings provisions before selecting the enactment.
Read the applicable text: Income-tax Act, 2025 as amended by the Finance Act, 2026: sections 1, 67, 84, 89, 263 and 536 Income-tax Act, 1961: section 54D for earlier periods Capital Gains Accounts Scheme, 1988, original scheme text CBDT Notification 161/2025, Capital Gains Accounts (Second Amendment) Scheme, 2025.
Keep three separate dates
Record the transfer date, the date compensation is received, and the date of qualifying purchase or construction. Section 84(1) normally allows three years after transfer. If compensation is not received on transfer, section 89 reckons the acquisition, investment or deposit period from receipt of compensation. Preserve the award and each actual receipt and review the treatment of instalments or enhanced awards separately; do not choose a later receipt date merely to extend the window.
Separate tax timing from the exemption calculation
Check the applicable section 67 charge and timing. Where section 67(12) applies, the original award is taken into account in the tax year of first receipt of any part of it, and a later enhancement normally in its receipt year. An enhancement received under an interim order follows the final-order rule in section 67(12)(c). Check any later reduction separately. Compute the gain under the relevant capital gains provisions before applying section 84; award proceeds are not automatically the gain. Compare that gain with qualifying replacement cost. Section 84 shelters up to that cost; excess gain remains chargeable. Segregate machinery, inventory and general relocation costs from the qualifying land, building, rights or construction.
Reconcile qualifying deposits and later expenditure
Section 84(2) requires the unutilised amount to be deposited under the notified scheme before filing the section 263 return and no later than the applicable section 263(1) due date. Where compensation is delayed, apply section 89 to the period available to acquire, invest or deposit, and verify which return and due date govern the gain. The extended replacement window does not by itself allow you to disregard the return-linked deposit rule. Keep the deposit proof with the return evidence. Under subsection (3) eligible utilisation and the qualifying deposit are included in the deemed cost for relief. Section 536(2)(j) preserves earlier schemes to the extent consistent with the corresponding new provisions. Use the Capital Gains Accounts Scheme, 1988 as carried forward to the extent consistent, including applicable amendments and the rules on designated deposit offices, withdrawals and proof. An ordinary deposit does not qualify. Track unused funds for the charge under subsection (4), which refers to the tax year of expiry of three years from transfer. Where the two dates differ, section 89 expressly shifts the period for acquisition, investment or deposit, while section 84(4)(a) expressly describes the tax year of charge by reference to the transfer date. Record both dates and review the interaction where they fall in different expiry tax years; do not assume the tax year of charge also moves automatically.
Keep the early-sale tax basis on file
For transfer of the replacement within three years of its purchase or construction, section 84(1) sets its cost at nil if the original gain exceeded its qualifying cost; otherwise reduce that cost by the original gain. Record this as a tax adjustment in the new asset file and keep it separate from book depreciation and any other applicable tax computation rule.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Partial reinvestment
Original capital gain is ₹72 lakh and qualifying replacement land costs ₹50 lakh. ₹50 lakh is sheltered and ₹22 lakh remains chargeable. For a sale of that replacement within the specified three years, the section 84 cost is nil.
Illustrative example 2: Replacement cost exceeds gain
A qualifying replacement site costs ₹90 lakh and original gain is ₹64 lakh. The entire ₹64 lakh is sheltered. If sold inside the three-year window, section 84 cost is ₹26 lakh before other applicable rules.
Illustrative example 3: Exclude unrelated equipment
The relocation budget is ₹95 lakh: qualifying land ₹55 lakh and production equipment ₹40 lakh. Against a gain of ₹68 lakh the supported relief is ₹55 lakh and the residual is ₹13 lakh.
Illustrative example 4: Deposit and current utilisation
An industrial company uses ₹36 lakh for qualifying new property and makes a qualifying deposit of ₹24 lakh against a gain of ₹67 lakh. Initial deemed cost is ₹60 lakh and ₹7 lakh is outside relief, subject to later utilisation review.
Illustrative example 5: Unused deposit
Compensation arrives on the transfer date. Of a qualifying ₹30 lakh deposit, ₹22 lakh is properly used before the three-year period ends. ₹8 lakh remains unused and is chargeable in the expiry tax year under subsection (4).
Illustrative example 6: Delayed award payment
Transfer is 10 July 2026 and compensation is received in full on 10 October 2026. The three-year acquisition period under section 89 is counted from receipt; the third anniversary is 10 October 2029 instead of 10 July 2029. Both anniversaries fall in tax year 2029–30 in this illustration. A qualifying purchase on 20 September 2029 is within the receipt-based window, subject to the deposit and other conditions.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Obtain the compulsory acquisition record | Award and vesting evidence. |
| 2 | Identify the original asset and ownership | Title, rights and fixed asset register. |
| 3 | Verify two years of industrial business use | Operating records for the relevant site. |
| 4 | Separate award components | Capital consideration and other receipts. |
| 5 | Confirm transfer and compensation dates | Order and bank proof. |
| 6 | Document qualifying replacement purpose | Investment approval and industrial project records. |
| 7 | Reconcile the capital gain and qualifying costs | Tax computation and component schedule. |
| 8 | Test deposit timing and scheme compliance | Due date, proof and permitted institution. |
| 9 | Track utilisation and expiry | Withdrawal and investment ledger. |
| 10 | Carry forward the early-sale basis adjustment | Replacement register and disposal control. |
Sixteen practitioner FAQs
1. Can a company qualify?
Yes, if it is the eligible assessee and meets the industrial undertaking and other conditions.
2. Does a negotiated voluntary sale qualify?
Section 84 requires transfer by compulsory acquisition under law.
3. Can a right in land qualify?
Yes, if the statutory conditions are met.
4. Is the two-year test merely ownership?
No. Establish business use by the taxpayer in the undertaking.
5. May the replacement be for a different industrial undertaking?
Yes. Setting up another industrial undertaking is an express qualifying purpose.
6. Does the entire award equal capital gain?
No. Compute the gain under the applicable provisions.
7. Can machinery expenditure fill the relief gap?
Section 84 identifies qualifying property and construction; machinery alone does not qualify.
8. What if only part of the gain is invested?
Compare gain and eligible cost; the excess is chargeable.
9. What if compensation is received late?
Test section 89 and preserve actual receipt dates.
10. Does section 89 itself determine the tax year of the gain?
No. Apply section 67 and any relevant transition rules separately.
11. Can an ordinary fixed deposit count?
Verify the applicable notified scheme and permitted institution.
12. Is the filing date relevant to deposit timing?
Yes. Section 84(2) requires deposit before filing and imposes the applicable due-date limit.
13. Does a qualifying deposit count at the initial stage?
Yes, as part of the deemed cost under subsection (3).
14. What happens to unused deposits?
Track the expiry-year charge and scheme withdrawal procedure.
15. Why maintain a separate tax basis for the replacement?
A transfer within three years can reduce the cost used for capital gains.
16. Can section 84 be applied mechanically to the AY 2026–27 return?
No. Identify the law for the year and the acquisition and receipt facts.
Official sources
Income-tax Act, 2025 as amended by the Finance Act, 2026: sections 1, 67, 84, 89, 263 and 536 Income-tax Act, 1961: section 54D for earlier periods Capital Gains Accounts Scheme, 1988, original scheme text CBDT Notification 161/2025, Capital Gains Accounts (Second Amendment) Scheme, 2025