Capital Gain Relief on Compulsory Acquisition: How Section 84 Protects Industrial Land and Buildings
Income Tax | Capital Gains
Capital Gain Relief on Compulsory Acquisition: How Section 84 Protects Industrial Land and Buildings
Under the Income-tax Act, 2025, a business whose factory land or building is taken over under law can keep the capital gain out of tax by reinvesting it in a replacement property within three years.
A notice arrives. A highway, a rail corridor or an industrial zone needs the plot your factory stands on, and the law gives you no option to refuse. Compensation follows, and with it a capital gain you never planned to book.
The tax law treats that situation differently from an ordinary sale. Section 84 of the Income-tax Act, 2025, which took effect on 1 April 2026, carries forward the relief that businesses knew for decades as Section 54D of the 1961 Act. The idea is simple: if the money goes back into land or a building for the same or another industrial undertaking, the gain is not charged to tax in the year of acquisition.
The detail is where claims succeed or fail. Two clocks run at the same time, a deposit deadline sits quietly inside the return-filing date, and a little-noticed cost adjustment can bring the gain back later. This guide walks through each of them with numbers.
The Four-Step Logic Behind the Relief
Parliament’s reasoning is that a forced transfer is not a profit-taking decision. The business has lost a working asset and needs the full compensation to get back on its feet, so taxing the gain immediately would shrink the very fund meant for rebuilding.
Worth knowingThe section uses two labels throughout. The property that was taken over is the original asset. The replacement land, building or right is the new asset.
Three Tests Every Claim Has to Pass
All three conditions in sub-section (1) must be met together. Missing any one of them takes the gain back to the normal charging provision in Section 67.
Test 1: A forced transfer
The land, building or any right in them must be transferred by way of compulsory acquisition under a law. A negotiated private sale does not count.
Test 2: Two years of real use
The property must have formed part of an industrial undertaking belonging to the taxpayer and been used for that business in the two years immediately before the transfer.
Test 3: Reinvestment in three years
Within three years after the transfer, the taxpayer must purchase other land or a building, or a right in them, or construct another building.
The purpose test hidden inside the third condition
Buying any property is not enough. The new asset has to be acquired for one of three purposes named in the section:
- Shifting the existing industrial undertaking to a new location
- Re-establishing the same industrial undertaking
- Setting up another industrial undertaking
That last limb is wider than many owners assume. The replacement does not have to house the same line of manufacturing, as long as it is an industrial undertaking. A residential flat, an office bought as an investment or agricultural land would not fit the wording.
Common slipPlant and machinery are outside this relief on both sides. The asset acquired must be land, a building or a right in them, and so must the replacement.
How Much of the Gain Actually Escapes Tax
The relief is not all or nothing. It is measured by comparing the capital gain with the cost of the new asset, and the smaller of the two is the amount that stays out of tax.
When the replacement costs less than the gain
Suppose factory land is compulsorily acquired and the capital gain works out to ₹10 lakh. The owner buys a smaller plot for ₹7 lakh. The excess of ₹3 lakh is charged as capital gain, and the remaining ₹7 lakh is relieved.
Example 1: Reinvesting part of the gain (₹ lakh)
When the replacement costs as much as the gain, or more
Now assume the same ₹10 lakh gain, but the new property costs ₹12 lakh. Nothing is charged in the year of acquisition, because the gain is fully absorbed by the cost of the new asset.
Example 2: Reinvesting the entire gain (₹ lakh)
The Resale Rule That Turns Relief Into a Deferral
Here is the part that surprises people. The gain is not forgiven outright on day one. If the new asset is transferred within three years of its purchase or construction, the law reduces its cost by the gain that was relieved earlier.
In Example 2, a sale inside three years would be computed on a cost of ₹2 lakh instead of ₹12 lakh. In Example 1, where the gain exceeded the cost of the new asset, the cost is treated as nil. Either way, the gain that was held back is brought to tax through the later sale.
The practical takeawayHold the replacement property for more than three years and the cost adjustment in Section 84 no longer applies. Sell earlier and the earlier relief is effectively reversed.
Money Not Yet Spent? The Deposit Route Keeps the Claim Alive
Land deals and construction rarely finish before the tax return is due. The section anticipates this. Any part of the gain that has not been used for the new asset before the return is filed must be deposited in a specified account, under the scheme notified by the Central Government.
Leaving the money in an ordinary savings or current account does not qualify, however clear the intention to reinvest. Four things have to line up:
- The unused amount is deposited with a specified bank or institution
- The deposit is made no later than the due date for filing the return under Section 263(1)
- Proof of the deposit accompanies the return
- The money is used only as the notified scheme permits
How the cost of the new asset is counted
For the purpose of the relief, the cost of the new asset is the amount already spent on it plus the amount deposited. Take a gain of ₹10 lakh where ₹4 lakh has been paid towards a new plot before the return is filed and ₹6 lakh sits in the specified account. The whole ₹10 lakh is treated as invested, and no gain is charged that year.
What happens if the deposit is never fully used
The deposit is a temporary parking arrangement, not a permanent shelter. Suppose ₹10 lakh was deposited and ₹3 lakh is still lying unused when three years from the date of transfer run out. That ₹3 lakh becomes taxable as capital gain of the tax year in which the three-year period expires. The owner can then withdraw the balance in line with the scheme.
One Acquisition, Several Deadlines: The Full Timeline
Mapping the dates on a single line makes the sequence easier to follow, and shows why the return due date is the one most often missed.
Five Outcomes at a Glance for a ₹10 Lakh Gain
The table below applies the rules to five situations a business owner might face. All figures are illustrative.
| Situation | Taxable in year of transfer | Gain relieved | Cost of new asset if sold within 3 years |
|---|---|---|---|
| New property bought for ₹7 lakh | ₹3 lakh | ₹7 lakh | Nil |
| New property bought for ₹10 lakh | Nil | ₹10 lakh | Nil |
| New property bought for ₹12 lakh | Nil | ₹10 lakh | ₹2 lakh |
| ₹4 lakh spent and ₹6 lakh deposited before the return due date | Nil | ₹10 lakh | Depends on final cost of the new asset |
| No purchase and no deposit | ₹10 lakh | Nil | Not applicable |
Read alongsideIn the fourth row, if ₹3 lakh of the deposit is still unused when three years from the transfer end, that ₹3 lakh is taxed in the tax year in which the period expires.
What We Know
- Section 84 of the Income-tax Act, 2025 has applied since 1 April 2026 and corresponds to Section 54D of the 1961 Act.
- It covers land, buildings and rights in them that formed part of an industrial undertaking and were used in it for two years before the transfer.
- The replacement must be bought or built within three years for shifting, re-establishing or setting up an industrial undertaking.
- Relief equals the gain or the cost of the new asset, whichever is lower.
- Unspent gain must be deposited under the notified scheme by the return due date.
- Unused deposits are taxed in the tax year in which three years from the transfer expire.
What Is Still Unclear
- The section does not define the term industrial undertaking, so borderline activities may turn on facts and past rulings.
- Readers should confirm which deposit scheme is currently notified for the new Act and which banks are authorised under it.
- Under the earlier law, the reinvestment period could be counted from the date compensation was received where payment came late. How the corresponding rule applies in a given case under the new Act should be checked with an adviser.
- How enhanced compensation awarded later by a court interacts with a claim already made depends on the facts of each case.
Frequently Asked Questions on Capital Gain Relief
What is capital gain relief under Section 84?
It is a provision of the Income-tax Act, 2025 under which capital gain from the compulsory acquisition of land or a building of an industrial undertaking is not charged to tax to the extent it is reinvested in new land or a building for an industrial undertaking within three years.
Is Section 84 the same as the old Section 54D?
Yes, in substance. Section 84 of the 2025 Act carries forward the relief earlier found in Section 54D of the Income-tax Act, 1961, with updated wording and references to the new section numbers.
Who can claim this capital gain relief?
Any taxpayer who owned an industrial undertaking whose land, building or right in them was compulsorily acquired under a law, provided the property was used for that undertaking’s business in the two years immediately before the transfer.
How much time do I get to buy the new property?
Three years after the date of transfer. The purchase or construction must be for shifting or re-establishing the undertaking, or for setting up another industrial undertaking.
What if I have not bought the new property before filing my return?
Deposit the unused gain in the specified account under the notified scheme on or before the return due date and attach proof to the return. The amount deposited is then counted as part of the cost of the new asset.
Is the whole capital gain exempt if I reinvest?
Only if the cost of the new asset, including any qualifying deposit, is equal to or more than the gain. If the new asset costs less, the difference is taxable in the year of transfer.
Can I sell the new property soon after buying it?
You can, but a sale within three years of its purchase or construction is computed on a reduced cost. The cost is cut by the gain relieved earlier, or taken as nil where the gain exceeded the cost, which brings the earlier gain back to tax.
Does the relief cover machinery or a residential house?
No. Both the asset acquired and the replacement must be land, a building or a right in land or a building connected with an industrial undertaking.
