Understanding Tax Exemption and TDS Issues on Land Acquisition Compensation
Introduction:
1. The acquisition of land by Government authorities or other agencies often raises questions regarding the taxability of compensation received by landowners.
2. This note outlines the current legal position on taxation and TDS applicability on land acquisition compensation.
Legal framework:
1. Under Section 45(5) of the Income-tax Act, where land is compulsorily acquired under any law, the capital gains are chargeable in the year of receipt of compensation, not in the year of acquisition. The provision also extends to enhanced compensation received later, which is taxable in the year of receipt.
2. If the acquired land is agricultural, Section 10(37) provides exemption for individuals and Hindu Undivided Families (HUFs), subject to the following conditions:
The land must be situated within a specified urban area.
It must have been used for agricultural purposes by the assessee (or a parent) for at least two years prior to acquisition.
The acquisition must be compulsory under any law.
3. Separately, rural agricultural land—as defined in Section 2(14)(iii)—is not treated as a capital asset. Consequently, compensation received for its acquisition is wholly outside the scope of capital gains tax.
Exemption under RFCTLARR Act, 2013:
1. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act), 2013 introduced a significant change. Section 96 of this Act provides that no income tax shall be levied on any compensation awarded under its provisions. This exemption covers the entire compensation package, including solatium, interest, and rehabilitation or resettlement benefits.
2. The CBDT, through Notification No. 79/2016 dated 25 October 2016, clarified that any compensation received in respect of an award or agreement exempt under Section 96 of the RFCTLARR Act shall not be taxable under the Income-tax Act.
TDS implications:
1. Under Section 194LA, any person responsible for paying compensation on compulsory acquisition of land (other than rural agricultural land) must deduct TDS at 10% where the payment exceeds ₹2,50,000.
2. However, despite the exemption provided under Section 96 of the RFCTLARR Act and CBDT Notification No. 79/2016, acquiring authorities often continue to deduct TDS under Section 194LA due to administrative caution or uncertainty regarding the legal nature of the acquisition.
Interest on compulsory acquisition:
Income received by way of interest on compensation or enhanced compensation is taxable under the head Income from Other Sources. A deduction of 50% of such interest income shall be allowed under Section 57 of the Income Tax Act.
