Capital Gains Exemptions for MNCs and Foreign Companies in India

Capital gains exemptions in India may apply to MNCs and foreign companies that reinvest proceeds from specified business asset transactions within the prescribed period and meet applicable use, documentation, and holding requirements under the Income-tax Act, 2025.

Foreign companies establishing or expanding operations in India often restructure manufacturing facilities, relocate industrial units, dispose of commercial real estate, or acquire new business assets as part of their investment strategy. These transactions may trigger capital gains tax under the Income-tax Act, 2025.

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While several capital gains exemptions under the new Income Tax Act are available only to individuals and Hindu Undivided Families (HUFs), certain exemptions are available to any assessee, making them relevant for foreign companies, Indian subsidiaries of multinational corporations (MNCs), branch offices, project offices, and other business entities operating in India. In addition, recent amendments have introduced targeted capital gains exemptions for specified foreign institutional investors investing in government securities.

Which capital gains exemptions are relevant to MNCs in India?

Foreign companies, Indian subsidiaries of MNCs, branch offices, project offices, and other business entities may benefit from four key reinvestment-based capital gains exemptions under the Income-tax Act, 2025.

The provisions are most relevant when a company is: 

1. Receiving compensation after the compulsory acquisition of industrial land or buildings.
2. Disposing of long-term land or buildings and reinvesting the gain in notified bonds.
3. Moving an industrial undertaking from an urban area to a non-urban location.
4. Relocating an industrial undertaking from an urban area to a Special Economic Zone (SEZ). 

Source: Income Tax Department, Ministry of Finance, GoI.

Section 84: Compulsory acquisition of industrial land or buildings

Section 84 can apply when the government compulsorily acquires land or a building used by an industrial undertaking. For an MNC, the provision may become relevant when a factory, industrial site, or operating facility is acquired for a highway, railway, airport, port, industrial corridor, or another public project.

What must the company do?

The company must use the compensation to acquire land or buildings for shifting or re-establishing the undertaking or to establish another industrial undertaking. The reinvestment must generally be completed within three years from the compulsory acquisition.

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If the amount cannot be fully deployed before the income tax return is filed, the unutilized balance may need to be placed in the Capital Gains Account Scheme (CGAS), subject to the applicable rules. The benefit may be reversed if the funds are not used within the permitted period or the replacement asset is transferred during the specified lock-in period.

Corporate planning points

• Confirm that the acquired asset was used for an industrial undertaking; ordinary investment property may not qualify.
• Map the compensation receipt, return-filing date, CGAS deadline, and three-year reinvestment window before committing to a replacement site.
• Retain the acquisition order, valuation and compensation records, proof of industrial use, board approvals, purchase or construction contracts, and payment evidence.
• Model indirect tax, stamp duty, transfer pricing, and state-incentive consequences separately; a capital gains exemption does not resolve those exposures.

Section 85: Investment of gains from land or buildings in specified bonds

Section 85 is the most broadly accessible of the four provisions because it does not require an industrial relocation. It can apply when a company realizes long-term capital gains from transferring land, a building, or both and invests the gain in qualifying notified bonds.

Eligible bonds and exemption limit

The investment must be made within six months of the transfer in bonds issued by notified institutions, which may include the National Highways Authority of India (NHAI), Rural Electrification Corporation Limited (REC), Housing and Urban Development Corporation Limited (HUDCO), Indian Renewable Energy Development Agency (IREDA), or another issuer notified by the central government.

The exemption is limited to the lowest of the long-term capital gain, the amount invested, or INR 5 million. For large corporate disposals, this ceiling means Section 85 usually provides partial rather than full shelter. The company should therefore compare the benefit with the bonds’ lock-in, yield, liquidity, and treasury requirements.

The exemption may be withdrawn if the bonds are transferred or converted into money within five years. Before investing, the company should confirm that the relevant bond issue is currently eligible and that subscription remains open.

When can Section 85 support an MNC transaction?

• Sale of surplus office premises following consolidation or hybrid-work restructuring.
• Disposal of warehouse or factory land as part of a supply-chain redesign.
• Sale of a legacy commercial property after an acquisition or group reorganisation.
• Monetization of land and buildings before investment in a new operating footprint.

Section 87: Relocation of an industrial undertaking from an urban area

Section 87 is designed for an industrial undertaking moving from an urban area to another location. It can cover gains from the transfer of plant and machinery, land, buildings, and rights in land or buildings used for industrial purposes.

Qualifying use of proceeds

The company may claim relief to the extent that the proceeds are applied toward new plant and machinery, the purchase or construction of industrial buildings, the transfer of the undertaking, and qualifying costs of establishing operations in a non-urban area. Investment is generally permitted from one year before to three years after the transfer. CGAS may be available for amounts not deployed by the relevant return-filing deadline.

This provision can support MNC manufacturing strategies involving a move from a high-cost urban site to an industrial cluster with better land availability, logistics access, labor supply, or state incentives. However, the tax exemption should be evaluated together with operational continuity, employee migration, environmental approvals, land-use permissions, and the treatment of depreciable assets.

Section 88: Relocation of an industrial undertaking to an SEZ

Section 88 provides a similar reinvestment route when an industrial undertaking relocates from an urban area to an SEZ. The eligible asset base can include plant and machinery, land, buildings, and rights in land or buildings used by the undertaking.

Relief may be available where the company reinvests in new plant and machinery, industrial premises, relocation expenditure, and the establishment of operations in the SEZ. The investment window is generally one year before or three years after the transfer, with CGAS potentially available for unutilized amounts. A disposal of the replacement assets within the specified holding period, or failure to use deposited funds on time, may reverse the benefit.

SEZ-specific review for foreign manufacturers

• Confirm that the destination unit and activity meet the relevant SEZ requirements; relocation alone does not establish eligibility.
• Separate the capital gains analysis from customs, goods and services tax (GST), foreign-trade, and SEZ approval requirements.
• Test whether existing state incentives, production-linked incentives, or contractual commitments are affected by the move.
• Coordinate the relocation timetable with asset transfers, import, or domestic procurement of machinery, licenses, and workforce migration.

How should an MNC assess eligibility for capital gains exemptions?

1. Identify the taxpayer and asset owner. Determine whether the seller is the foreign company, its Indian subsidiary, a branch, or another group entity. The entity that realizes the gain must satisfy the exemption conditions.
2. Classify the asset and the corporate event. Establish whether the transaction concerns industrial land or buildings, long-term real estate, plant and machinery, or rights in property—and whether it involves compulsory acquisition, disposal, or relocation.
3. Confirm the asset’s use and holding period. Document industrial use, urban or SEZ location, and long-term status where required. Review whether depreciable-asset rules alter the computation.
4. Ring-fence the reinvestment timetable. Work backwards from the transfer or acquisition date, the tax-return deadline, and the statutory investment period. Consider CGAS where permitted.
5. Quantify the realistic benefit. Compare the gain, qualifying expenditure, statutory cap, and potential clawback. Include the commercial return and liquidity cost of any bond investment.
6. Build an evidence file. Maintain agreements, invoices, payment trails, board approvals, valuations, title documents, asset registers, location evidence, CGAS records, and proof of commissioning or operational use.

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Common risks for foreign companies

• Assuming corporate eligibility is enough: each provision also imposes strict conditions on the asset, transaction, reinvestment, timing, and subsequent disposal.
• Missing the six-month bond deadline or the return-linked CGAS deposit requirement.
• Treating the INR 5 million Section 85 ceiling as material protection for a large property sale without modeling the residual taxable gain.
• Failing to align legal ownership with the entity claiming relief in a group restructuring.
• Overlooking treaty, transfer pricing, withholding, indirect tax, stamp duty, exchange control, or permanent-establishment consequences.
• Selling replacement assets or accessing restricted investments before the prescribed holding period ends.

Do the institutional investor exemptions apply to operating MNCs?

Generally, no. Targeted exemptions for eligible foreign institutional investors, notified foreign portfolio investors, or the Bank for International Settlements concern specified investments in Indian government securities. They are distinct from the reinvestment relief available for business-asset transactions and ordinarily do not apply to a foreign company merely because it manufactures, trades, or provides services in India.

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Frequently asked questions

Can a foreign company claim a capital gains exemption in India?

Yes. A foreign company may claim an exemption where the relevant section applies to any assessee and the company meets all asset, reinvestment, timing, and holding conditions. Foreign ownership does not by itself create or prevent eligibility.

Which provision is most relevant to the sale of corporate real estate?

Section 85 may apply to long-term gains from land or buildings if the company invests in eligible notified bonds within six months. The exemption is capped at INR 5 million, so the remaining gain may still be taxable.

Can an Indian subsidiary of an MNC use the relocation exemptions?

Potentially. Sections 87 and 88 can apply to companies relocating qualifying industrial undertakings, provided the transferred assets, destination, reinvestment, and timetable satisfy the statutory conditions.

Does moving a service office qualify as industrial relocation?

Not automatically. The provisions focus on an industrial undertaking and specified business assets. A service-office move should be reviewed against the statutory definitions and facts before relief is assumed.

What happens if reinvestment is delayed?

Where permitted, unutilized amounts may be deposited under CGAS by the applicable deadline. Failure to invest or use deposited funds within the statutory period can make the amount taxable.

Should the exemption be reviewed before the asset is sold?

Yes. Early review helps the company identify the correct entity, preserve evidence, plan the reinvestment, meet short deadlines, and assess whether the tax saving supports the broader commercial transaction.

Key takeaway for multinational groups

India’s corporate capital gains exemptions are best treated as transaction-planning tools, not automatic deductions. Sections 84, 85, 87, and 88 may reduce the tax cost of compulsory acquisition, property rationalization, or industrial relocation, but only when the legal owner, asset classification, reinvestment, deadlines, and evidence are aligned from the outset. MNCs should therefore integrate the exemption review into real-estate, manufacturing, treasury, and restructuring decisions before signing or transferring assets.

A well-executed audit in India is crucial to ensure compliance with local regulations, verify financial accuracy, and identify risks, while a clean, structured audit process helps businesses stay ahead and gain clear visibility into operations.

Lalitha Rao

Manager

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