What happens if the government compulsorily acquires your factory land or industrial building? You may receive compensation for the property, but the transfer could also result in a capital gain and an income-tax liability.
To support businesses that need to relocate or re-establish their operations, Section 84 of the Income-tax Act, 2025 provides capital gains relief in certain cases involving the compulsory acquisition of land, buildings, or rights in land or buildings used by an industrial undertaking.
Under this provision, an eligible taxpayer can receive relief by purchasing or constructing a replacement property within the prescribed period. The relief depends on the amount of capital gain and the cost of the replacement property.
In simple terms:
Government acquires your industrial property → you earn a capital gain → you invest in a replacement property for business relocation or re-establishment → you may receive capital gains tax relief.
Let’s understand the eligibility conditions, calculations, deposit requirements, and important rules under Section 84.
What Is Section 84 of the Income-tax Act, 2025?
Section 84 deals with capital gains on the compulsory acquisition of land and buildings in specified circumstances.
It applies when land, a building, or a right in land or a building forms part of an industrial undertaking and is compulsorily acquired under a law. The taxpayer must also satisfy the conditions relating to the property’s business use and the purchase or construction of a replacement asset.
The provision allows the capital gain to receive specified tax relief when the taxpayer reinvests in an eligible replacement property for shifting or re-establishing the existing industrial undertaking or setting up another industrial undertaking.
The original property is called the Original Asset, while the replacement property is called the New Asset.
1. When Does Section 84 Apply?
To claim relief under Section 84, the taxpayer must satisfy the following conditions.
Condition 1: Compulsory Acquisition of the Original Asset
The original asset must be a capital asset consisting of:
- Land forming part of an industrial undertaking.
- A building forming part of an industrial undertaking.
- A right in land or a building forming part of an industrial undertaking.
The transfer must occur through compulsory acquisition under a law.
A normal sale of factory land to a private buyer does not automatically qualify for this relief.
Condition 2: The Property Must Have Been Used for Business
The property must have formed part of the taxpayer’s industrial undertaking and must have been used for the business of that undertaking during the two years immediately preceding the date of transfer.
This requirement helps establish the connection between the acquired property and the industrial business.
Condition 3: Purchase or Construction of a New Asset Within Three Years
Within three years after the date of transfer, the taxpayer must purchase or construct an eligible replacement property for one of the following purposes:
- Shifting the existing industrial undertaking.
- Re-establishing the existing industrial undertaking.
- Setting up another industrial undertaking.
The eligible new asset may consist of other land, a building, a right in land or a building, or another building constructed for the specified purpose.
All conditions should be reviewed carefully before claiming relief.
2. How Is Capital Gains Relief Calculated Under Section 84?
The amount of relief depends on the relationship between the capital gain and the cost of the new asset.
There are two main situations.
Case 1: Capital Gain Is Greater Than the Cost of the New Asset
If the capital gain exceeds the cost of the replacement property, the difference is taxable under the applicable capital gains provisions.
Formula:
Taxable capital gain = Capital gain − Cost of the new asset
Example 1: Partial Investment of Capital Gain
Suppose the government compulsorily acquires a company’s industrial land. The transaction results in a capital gain of ₹10 lakh.
The company purchases a qualifying replacement property for ₹7 lakh within the prescribed period.
| Particulars | Amount |
| Capital gain on compulsory acquisition | ₹10,00,000 |
| Cost of the new asset | ₹7,00,000 |
| Capital gain taxable under Section 84 | ₹3,00,000 |
| Capital gain receiving relief | ₹7,00,000 |
In this example, the company invests ₹7 lakh in the replacement property. The remaining ₹3 lakh is chargeable to tax under the applicable provisions.
The relief is limited to the amount invested in the eligible new asset.
Important: If the company transfers the new asset within three years of its purchase or construction, Section 84 provides that its cost will be treated as nil when calculating the capital gain from that transfer.
Case 2: Capital Gain Is Equal to or Less Than the Cost of the New Asset
If the cost of the qualifying new asset equals or exceeds the capital gain, the capital gain is not charged under the applicable capital gains provision at that stage.
However, the relief has an important consequence for the cost of the new asset.
For calculating a future capital gain if the new asset is transferred within three years of its purchase or construction, its cost is reduced by the amount of the capital gain covered by the relief.
Example 2: Reinvestment of the Entire Capital Gain
Suppose the capital gain from compulsory acquisition is ₹10 lakh, and the taxpayer purchases a qualifying replacement property for ₹12 lakh.
| Particulars | Amount |
| Capital gain on the original asset | ₹10,00,000 |
| Actual cost of the new asset | ₹12,00,000 |
| Capital gain charged at this stage under Section 84 | ₹0 |
| Less: Capital gain receiving relief | ₹10,00,000 |
| Adjusted cost for a transfer within three years | ₹2,00,000 |
The taxpayer receives relief on the entire ₹10 lakh capital gain at the time of the original transfer.
However, the adjusted cost of ₹2 lakh becomes relevant if the new asset is transferred within the three-year period specified in Section 84.
The cost adjustment prevents the taxpayer from receiving the full relief and then using the entire original purchase cost to calculate a lower gain on an early sale of the replacement property.
3. What If You Have Not Purchased the New Property Before Filing Your Tax Return?
Section 84(2) addresses situations where the taxpayer has not used the entire capital gain to purchase or construct the new asset before filing the income-tax return.
The taxpayer cannot simply leave the unused money in an ordinary bank account and automatically claim the benefit.
Instead, the unutilised amount must be deposited in a specified bank or institution and used according to the scheme notified by the Central Government.
The key requirements are:
- Deposit the unutilised amount in the specified bank or institution.
- Make the deposit before filing the income-tax return and no later than the applicable due date under Section 263(1).
- Submit proof of the deposit along with the return.
- Use the deposited money in accordance with the notified scheme and the applicable requirements.
This arrangement allows the taxpayer to retain eligibility for the relief while arranging the qualifying replacement property, subject to the statutory conditions.
Example 3: Part of the Capital Gain Is Still Unspent
Suppose a taxpayer earns a capital gain of ₹10 lakh from compulsory acquisition.
Before filing the return, the taxpayer has spent ₹4 lakh on a qualifying replacement property but has not yet used the remaining ₹6 lakh.
The taxpayer deposits the unused ₹6 lakh in the specified account within the prescribed deadline and submits the required proof.
| Particulars | Amount |
| Capital gain | ₹10,00,000 |
| Amount already spent on the new asset | ₹4,00,000 |
| Amount deposited under the specified scheme | ₹6,00,000 |
| Total amount considered as the cost of the new asset | ₹10,00,000 |
Under Section 84(3), the amount already used to purchase or construct the new asset and the amount deposited under the scheme are treated together as the cost of the new asset for the purposes of the relief.
As a result, the entire ₹10 lakh capital gain may qualify for relief, provided all applicable conditions are met.
4. What Happens If You Do Not Use the Deposited Money Within Three Years?
The taxpayer must use the deposited amount for the qualifying purchase or construction within three years from the date of transfer of the original asset.
If the deposited amount is not fully used within that period, the unused portion becomes taxable under the applicable capital gains provision in the tax year in which the three-year period expires.
The taxpayer can then withdraw the unused amount in accordance with the notified scheme.
Example 4: ₹3 Lakh Remains Unused After Three Years
Suppose a taxpayer earns a capital gain of ₹10 lakh and deposits the full amount under the specified scheme.
Within three years, the taxpayer uses ₹7 lakh to purchase or construct the qualifying new asset. The remaining ₹3 lakh stays unused when the three-year period expires.
| Particulars | Amount |
| Amount deposited under the scheme | ₹10,00,000 |
| Amount used for the new asset | ₹7,00,000 |
| Amount remaining unused | ₹3,00,000 |
| Amount chargeable under Section 84(4) | ₹3,00,000 |
The unused ₹3 lakh is charged under the applicable capital gains provision as income of the tax year in which the three-year period expires.
The taxpayer may withdraw the unused amount according to the scheme.
Therefore, depositing the money alone does not guarantee permanent relief. The taxpayer must use it for the prescribed purpose within the permitted period.
5. What Is the Difference Between Section 84 Relief and a Complete Tax Exemption?
Section 84 can provide substantial relief, but taxpayers should understand how the provision works.
The result depends on the amount invested in the replacement property and whether the taxpayer follows the applicable requirements.
- If the cost of the new asset is lower than the capital gain, the excess is taxable.
- If the cost of the new asset equals or exceeds the capital gain, the capital gain is not charged at that stage under Section 84.
- If the new asset is transferred within three years, special cost-adjustment rules apply.
- If money deposited under the scheme remains unused after three years, the unused amount becomes taxable in the prescribed tax year.
Consequently, the relief may postpone or reduce the immediate tax burden, but the taxpayer must also consider the future tax consequences of selling the replacement property.
6. Important Points to Remember Under Section 84
Before claiming relief, taxpayers should keep these points in mind:
- The original asset must be land, a building, or a right in land or a building that forms part of an industrial undertaking.
- The acquisition must be compulsory and carried out under a law.
- The property must have been used for the business of the industrial undertaking during the two years immediately preceding the transfer.
- The qualifying replacement property must be purchased or constructed within three years after the transfer.
- The replacement property must serve the purpose of shifting or re-establishing the existing undertaking or setting up another industrial undertaking.
- If the new asset has not been acquired before filing the return, the unused amount must be handled under the specified deposit scheme and statutory deadlines.
- Unused deposits after the three-year period become taxable under the applicable provision.
- The adjusted cost of the new asset may affect the calculation of capital gains if it is transferred within three years.
Taxpayers should maintain acquisition documents, compensation records, capital gains calculations, purchase or construction bills, deposit receipts, and proof of compliance with the notified scheme.
Conclusion
Section 84 of the Income-tax Act, 2025, provides capital gains relief when qualifying industrial land, buildings, or related rights are compulsorily acquired and the taxpayer reinvests in an eligible replacement property.
The taxpayer must satisfy the two-year business-use requirement and purchase or construct the replacement property within three years. The amount of relief depends on the capital gain and the cost of the new asset.
If the taxpayer has not yet invested the entire amount, the specified deposit scheme may help preserve eligibility, provided the taxpayer follows the prescribed deadline and other requirements. Any amount left unused after three years becomes taxable under the applicable provisions.
Businesses facing compulsory acquisition should review Section 84 carefully, maintain proper records, and seek professional advice when necessary to calculate the relief and understand the future tax implications.
FAQs
1. What is Section 84 of the Income-tax Act, 2025?
Section 84 provides capital gains relief in certain cases where land, a building, or a right in land or a building used by an industrial undertaking is compulsorily acquired and the taxpayer purchases or constructs an eligible replacement property.
2. How long must the original property have been used for the industrial business?
The property must have been used for the business of the industrial undertaking during the two years immediately preceding the date of transfer.
3. What is the time limit for purchasing or constructing the new asset?
The qualifying replacement property must be purchased or constructed within three years after the date of transfer of the original asset.
4. Is the entire capital gain exempt if I reinvest it in a new property?
If the cost of the qualifying new asset equals or exceeds the capital gain, the gain is not charged at that stage under Section 84. However, the cost of the new asset may be reduced by the relieved gain for calculating a future capital gain if the new asset is transferred within three years.
5. Can I claim relief if I have not purchased the new property before filing my return?
You may qualify by depositing the unutilised amount in a specified bank or institution under the notified scheme, provided you follow the statutory deadline, submit proof with the return, and meet the other requirements.
6. What happens if the deposited amount remains unused after three years?
The unused amount becomes chargeable under the applicable capital gains provision in the tax year in which the three-year period expires. It may then be withdrawn according to the notified scheme.
7. Does Section 84 apply to every compulsory acquisition of property?
No. The section applies to qualifying compulsory acquisitions of land, buildings, or related rights forming part of an industrial undertaking, subject to the business-use and reinvestment conditions. A compulsory acquisition of unrelated property does not automatically qualify.
