Compulsory land acquisition compensation: Key income tax exemptions you should know

When the government acquires private land for public purposes, landowners receive compensation, which can sometimes include capital gains.

Normally, capital gains on property are taxable under the Income Tax Act, 1961. However, in cases of compulsory land acquisition, the law provides special exemptions that protect landowners from paying tax on the compensation received.

This applies to both agricultural and non-agricultural land, ensuring that landowners receive full compensation without any tax burden.

The Central Board of Direct Taxes (CBDT) reinforced this exemption through Circular No. 36/2016, confirming that compensation under RFCTLARR is not chargeable under the Income Tax Act.

CA Dr. Suresh Surana explains: "As such, compensation received for compulsory acquisition of land under the RFCTLARR Act (except those made under section 46 of the RFCTLARR Act), is exempted from the levy of income tax. Although capital gains are generally taxable under the Income-tax Act, an overriding exemption applies in cases of compulsory acquisition under the RFCTLARR Act, 2013. Such compensation shall not be taxable, ensuring landowners are not unfairly burdened."

Case study: NH-169 acquisition

Justice S R Krishnakumar ruled in favour of the petitioner, citing Section 96 of the RFCTLARR Act and earlier precedents.

Key takeaways for landowners

• Principal compensation is fully tax-exempt under RFCTLARR.

• Covers both agricultural and non-agricultural land.

• Landowners can challenge wrongful TDS deductions in court.

Understanding these provisions ensures landowners receive fair, Income tax-free compensation and avoid unnecessary disputes with tax authorities.