Most NRIs first encounter capital-gains exemptions through Section 54 -- sell a house, buy another house, roll the gain over. Section 54F, renumbered as Section 86 under the Income-tax Act, 2025, solves a related but different problem: you've sold something that isn't a house -- listed shares, an unlisted company's shares, gold, a non-agricultural plot, a business asset -- and you want to shelter the long-term gain by investing in one residential house in India. It's the provision that applies, for instance, when an NRI liquidates a stock portfolio or sells inherited jewellery and buys an apartment instead.
It sits deliberately apart from the article on Section 54/54EC rollovers and the one on selling agricultural land in this cluster, because the asset being sold, the exemption formula, and the conditions attached are all different enough to trip up someone who assumes 'the house exemption' works the same way regardless of what triggered the gain.
Who qualifies, and the ownership condition NRIs often trip over
Section 86 is open to individuals and Hindu Undivided Families -- NRIs qualify on the same terms as resident taxpayers, with one condition that catches long-settled NRIs specifically: on the date the original asset is sold, you must not already own more than one other residential house in India (besides the new one you're about to buy). NRIs who've accumulated a couple of Indian flats over a decade of NRE deposits and family purchases, entirely legitimately, can find that the second property alone disqualifies a 54F/86 claim on an unrelated share sale.
There's also a forward-looking version of the same restriction: buying another residential house (other than the new one) within one year, or constructing one within three years, of the original sale can retroactively withdraw the exemption already claimed, converted back into a taxable long-term gain in the year the disqualifying purchase happens.
The reinvestment math: proportionate exemption, not full rollover
This is the detail that most differentiates Section 86 from a straight Section 54 rollover. Under Section 54, the exemption is simply the gain, capped at what you reinvest. Under Section 86, the exemption is proportionate to how much of the net sale consideration -- not just the gain -- gets reinvested: exemption equals the capital gain multiplied by (cost of the new house divided by net sale consideration of the asset sold). Reinvest half the sale proceeds, and only half the gain is exempt, even if that half comfortably covers the entire gain in absolute terms.
A cap introduced from FY 2023-24 and carried into Section 86 also limits both figures in the formula to Rs 10 crore -- if the net consideration or the cost of the new house exceeds that, the excess is disregarded for the exemption calculation, which matters for NRIs selling a significant shareholding or a large parcel of land.
Timelines, location, and the CGAS parking requirement
The new house has to be purchased within one year before or two years after the sale, or constructed within three years -- and it has to be in India. There's no version of Section 86 that lets an NRI shelter an Indian capital gain by buying property in the US, UAE, or anywhere else; the reinvestment asset has to sit inside the Indian tax net.
If you haven't completed the purchase or construction by the time your return is due, the unutilised amount has to be parked in a Capital Gains Account Scheme deposit at an authorised bank before the filing deadline, or the exemption is simply unavailable for that portion. NRIs can open CGAS deposits, but only under the NRO route, at a bank branch -- it's worth confirming in advance which branches actually offer this to non-resident customers, since not every branch does.
How the TDS regime interacts with this
None of this changes what happens on the sale side under Section 393(2): if you're selling shares or property as an NRI, the buyer, broker, or company involved may already be required to withhold tax on the transaction before you've had a chance to claim the Section 86 exemption. For asset classes where the payer withholds on the full consideration by default, the practical fix is the same one that applies elsewhere in this cluster -- apply for a lower or nil-deduction certificate under Section 395 before the sale closes, factoring the Section 86 exemption you intend to claim into the application, rather than over-withholding and chasing a refund a year later.