Budget 2026 tax benefit for landowners: Income from compulsory acquisition to be fully tax‑free

Union Budget 2026-27 has clarified that income arising from the compulsory acquisition of land under the RFCTLARR Act will be fully exempt from tax, regardless of whether the land is agricultural or non-agricultural.

According to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act), the union or a state government in India can acquire land for public purposes by fairly compensating the landowners and mandating Social Impact Assessment (SIA), rehabilitation, and resettlement (R&R) for affected families. 

In the Union Budget 2026, Finance Minister Nirmala Sitharaman proposed tax exemption for individuals and Hindu Undivided Families (HUFs) on income from compulsory land acquisition for individuals and Hindu Undivided Families

"In order to specifically provide exemption for acquisition of land under the provisions of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, it is proposed to provide exemption to an individual or a Hindu undivided family on any income in respect of any award or agreement made on account of compulsory acquisition of any land under the said Act (other than the award or agreement made under section 46 of said Act),” as per the Budget 2026. 

If your land gets compulsorily acquired by the government for a public purpose, any compensation that you receive through an award, or through a settlement agreement, under the RFCTLARR Act, will not be taxed. 

What does the Income Tax Department say? 

Until now, there was uncertainty over whether the compensation under the RFCTLARR Act is taxed or not, but now the government has clarified by providing an exemption to individuals and HUFs. As per the present provisions, the compensation is exempt from capital gains tax arising from transfers of agricultural land. 

“The current provisions of the Income-tax Act, 2025, exempt the capital gains arising to an individual or a Hindu undivided family from the transfer of agricultural land by way of compulsory acquisition. However, the RFCTLARR Act does not make any distinction between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income-tax,” the tax department said in the Budget FAQs.

Now, the government has brought clarity, aligning the provisions of the Income Tax Act and the RFCTLARR Act.

“ In the proposed amendment, any income of an individual or Hindu undivided family in respect of any award or agreement made on account of compulsory acquisition of any land under the RFCTLARR Act (other than award and agreement made under section 46) is proposed to be exempted irrespective of whether such compulsory acquisition under the said Act is of agricultural or non-agricultural land,” the FAQs said. 

The change will come into effect from April 1, 2026. 

“The acquisition of land before 1st April, 2026 (up to financial year 2025-26) shall continue to be exempted as per the clarification given vide CBDT Circular No.36/2016 dated 25  October, 2016,” the FAQs said. 

Section 46 exception

There is one exception to this rule: If you get the compensation through an award or agreement under Section 46 of the Act, which is for acquisitions carried out through private companies or public-private partnership arrangements, it may still be taxed. 

This is because Section 46 deals with land acquired for a private company or PPP project, where the government just facilitates the process. These are not intended for public purposes, making them more akin to commercial transactions. In these cases, the end beneficiary is a private company (or PPP), and it’s not just a compulsory acquisition by the government, while it still falls under the RFCTLARR Act.