Is Land Acquisition Compensation Taxable? Section 96 RFCTLARR, Section 10(37) and TDS Rules (AY 2026-27)

A notice arrives from the NHAI, a state industrial development corporation or a metro rail authority: your plot falls in the alignment, and it is being acquired. Months later a compensation award lands in your bank account, sometimes with TDS already deducted, sometimes without. The question that follows is almost always the same - do I pay capital gains tax on this?

For most individuals the answer is no. Compensation for the compulsory acquisition of land in India is, in the vast majority of cases, entirely exempt from income tax. But the exemption comes from an unusual place: not from the Income Tax Act at all, but from Section 96 of a separate 2013 land acquisition law. That quirk is why so many taxpayers, and occasionally their deductors, get this wrong.

This guide covers which law exempts what, when TDS under Section 194LA still bites, how interest on enhanced compensation is treated differently from the compensation itself, and exactly where this goes in your return for AY 2026-27 (FY 2025-26).

Compulsory Acquisition Is Still a "Transfer"

Start with the default position. Section 2(47) of the Income Tax Act expressly includes "compulsory acquisition thereunder of any capital asset" in the definition of transfer. So an acquisition is a transfer even though you never agreed to sell, and it would ordinarily trigger capital gains.

Section 45(5) then fixes the timing. Unlike a normal sale, where the gain is taxed in the year of transfer, compensation on compulsory acquisition is taxable in the year the compensation is first received, not the year the land was taken over. This matters because acquisition awards are routinely paid years after possession, and enhanced compensation ordered by a court can arrive a decade later.

That is the baseline. Now the exemptions, which in practice swallow the rule.

Section 96 of the RFCTLARR Act: The Big One

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 - mercifully shortened to RFCTLARR - replaced the colonial-era Land Acquisition Act, 1894. Section 96 of that Act says that no income tax shall be levied on any award or agreement made under it, except an agreement under Section 46.

Read that again: it is a blanket exemption. It does not distinguish agricultural from non-agricultural land. It does not care whether you are an individual, an HUF, a firm or a company. If the acquisition is governed by RFCTLARR and compensation flows from an award or agreement under it, income tax does not apply.

This created genuine confusion for a few years, because Section 10(37) of the Income Tax Act only exempts agricultural land, and assessing officers were taxing compensation on acquired house plots while the acquisition statute said no tax was payable.

CBDT settled it through Circular No. 36/2016 dated 25 October 2016. The circular accepts that compensation received for compulsory acquisition of land under RFCTLARR, other than agricultural land, is also exempt from income tax, and that such compensation is not taxable even though there is no corresponding exemption in the Income Tax Act itself.

Does RFCTLARR Cover Your Acquisition?

This is the question that actually decides your tax outcome, and it is a factual one.

Many acquisitions happen under specialised statutes rather than RFCTLARR - the National Highways Act, 1956, the Metro Railways Act, the Railways Act, various state town planning and industrial development Acts. The Fourth Schedule to RFCTLARR lists 13 such Central enactments. By an order effective 1 January 2015, the compensation, rehabilitation and resettlement provisions of RFCTLARR were extended to those 13 Acts. Acquisitions under them, on or after that date, therefore carry the Section 96 exemption as well.

Two situations need care:

• Acquisition under a State Act not covered by the RFCTLARR framework. Section 96 does not apply on its own force. You fall back on the Income Tax Act, so only Section 10(37) or the capital gains exemptions can help you.
• A negotiated private purchase by a government body. If the authority simply bought your land through a sale deed instead of invoking acquisition powers, there is no "award" and no compulsion. This is an ordinary sale, taxed like any other property sale capital gain.

Check the award copy. It cites the section and the Act under which the acquisition was made. That citation is your evidence.

Section 10(37): The Income Tax Act's Own Exemption

Section 10(37) remains important for acquisitions outside the RFCTLARR net. It exempts capital gains on compulsory acquisition where all of the following hold:

The exemption is absolute, not a deferral - there is no reinvestment requirement and no lock-in. If the land was rural agricultural land to begin with, you never reach Section 10(37), because such land is excluded from "capital asset" by Section 2(14). Our guide to the rural versus urban agricultural land test walks through the distance and population criteria in detail.

Note what Section 10(37) does not cover: a residential plot, a house, a shop or industrial land. For those, your exemption has to come from Section 96, or from reinvestment under Sections 54, 54F or 54EC. Section 54D offers a further route, but only for industrial undertakings reinvesting in replacement industrial property - rarely relevant to individuals.

TDS Under Section 194LA

Section 194LA requires the acquiring authority to deduct TDS at 10% on compensation for compulsory acquisition of immovable property. Agricultural land is outside its scope entirely.

The threshold was raised from Rs 2,50,000 to Rs 5,00,000 with effect from 1 April 2025, so for FY 2025-26 no TDS is due unless aggregate compensation to you in the year exceeds Rs 5 lakh.

Crucially, the proviso to Section 194LA says no deduction shall be made where the payment is exempt from income tax under Section 96 of RFCTLARR. In a correctly administered RFCTLARR acquisition, you should see no TDS at all.

In practice, deductors sometimes deduct anyway - out of caution, or because the file does not record the governing statute clearly. If that happens, the compensation does not become taxable just because tax was deducted. Claim the TDS credit in your return, report the compensation as exempt, and the refund follows. Verify the entry appears in your AIS and Form 26AS before filing; our guide on Form 26AS, AIS and TIS explains how to cross-check.

Interest on Enhanced Compensation: Taxable

This is where most of the real tax arises, and where taxpayers are most often caught out.

Land owners routinely litigate the award and win enhanced compensation years later, with interest for the delay. The two components are treated very differently:

• Enhanced compensation itself carries the same character as the original compensation. If the original award was exempt under Section 96 or 10(37), the enhancement is too, and it is taxable in the year it is received under Section 45(5)(b) if it is not exempt.
• Interest on compensation or enhanced compensation is taxable as income from other sources under Section 56(2)(viii), in the year of receipt, under Section 145B(1) - regardless of which years it accrued over.

Section 57(iv) softens this with a flat 50% deduction on such interest. No other expense is allowed against it.

Worked Example

Ramesh's urban plot in Pune was acquired by a state authority in 2019. He received the original award of Rs 40 lakh then. In FY 2025-26 the reference court granted enhanced compensation of Rs 22 lakh plus Rs 9 lakh of interest for the delay.

So Rs 31 lakh hits his bank account and Rs 4.5 lakh enters his taxable income. If TDS was deducted on the interest under Section 194A, he claims that credit against the liability.

One caveat worth knowing: whether interest granted under Section 28 of the old Land Acquisition Act, 1894 is "compensation" rather than interest has been litigated extensively. The Supreme Court in CIT v. Ghanshyam (HUF) treated it as part of compensation, while later High Court rulings have applied Sections 56(2)(viii) and 145B to tax it as interest. If the sums involved are large, this is worth a conversation with your CA before filing rather than after a notice arrives.

How to Report It in Your ITR

Exempt does not mean invisible. The acquiring authority reports the payment, and it will show up in your AIS.

• Exempt compensation. Disclose it under the exempt income schedule of ITR-2 (Schedule EI). Do not enter it in Schedule CG as a taxable gain.
• Taxable capital gain (acquisition outside the RFCTLARR framework with no exemption available). Report in Schedule CG, with the year of first receipt as the year of taxation.
• Interest received. Report the gross interest under income from other sources, then claim the 50% deduction under Section 57(iv) in the same schedule. Entering only the net figure is a common error that triggers a mismatch against AIS.
• TDS credit. Claim credit for any 194LA or 194A deduction in Schedule TDS, matching the deductor TAN exactly.

Because capital gains and Schedule EI are involved, this is an ITR-2 filing - ITR-1 cannot carry it. 49Tax reads the TDS entries from your AIS and Form 26AS and maps them to the right schedule, so a 194LA deduction does not quietly go unclaimed.

Keep the award copy, the acquisition notification and any court order for enhanced compensation.

The Takeaway

Before you assume capital gains are payable on acquisition compensation, pull out the award and read which Act it was issued under. If it is RFCTLARR, or one of the 13 Fourth Schedule enactments for an acquisition on or after 1 January 2015, the compensation is exempt - agricultural or not - and any TDS deducted is simply refundable. Then isolate the interest component, because that is the one part the exemption never reaches, and it is taxable at half its value in the year you receive it.