Income Tax

Tax on Compensation for Compulsory Acquisition of Land: Section 96 & 10(37) Exemptions

CA Nikhil Gupta·June 2026·8 min readCapital Gains

Reviewed by CA Nikhil Gupta · Last reviewed 17 June 2026

Government infrastructure projects - highways, metro corridors, industrial corridors - often require compulsory acquisition of privately-owned land. The compensation received can trigger a significant capital gains tax liability, but the law also provides targeted exemptions, particularly for agricultural land. Understanding when compensation is exempt, when it's taxable, and how 'enhanced compensation' received years later is treated is essential for landowners caught up in such acquisitions.

Is Compensation for Compulsory Acquisition Taxable?

As a starting point, the transfer of a capital asset by way of compulsory acquisition under any law (such as the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, or other acquisition statutes) is treated as a "transfer" for capital gains purposes, and the compensation received is generally the "full value of consideration" for computing capital gains - unless a specific exemption applies.

Exemption for Compulsory Acquisition of Urban Agricultural Land

Section 10(37): A significant exemption for individuals/HUFs - Capital gains arising to an individual or HUF from the transfer (by way of compulsory acquisition, or a transfer the consideration for which was determined/approved by the government/RBI) of agricultural land situated in a specified urban area is fully exempt from capital gains tax, subject to conditions including that the land was used for agricultural purposes by the individual/HUF (or their parent, in certain cases) for a specified period preceding the transfer, and the compensation/transfer occurred during the specified period (including enhanced compensation received later).

What About Rural Agricultural Land?

Agricultural land situated in a rural area (as defined - broadly, areas outside specified municipal/urban limits and population/distance thresholds) is generally not even treated as a "capital asset" under the Income Tax Act in the first place. This means its transfer - whether by compulsory acquisition or otherwise - typically does not attract capital gains tax at all, regardless of Section 10(37), because there's no "capital asset" being transferred in the technical sense.

Compensation for Non-Agricultural Land or Other Assets

Asset Type	Tax Treatment of Compensation
Agricultural land in a rural area	Not a capital asset - generally no capital gains tax
Agricultural land in a specified urban area (individual/HUF, conditions met)	Exempt under Section 10(37)
Non-agricultural land, buildings, or other capital assets (compulsorily acquired)	Taxable as capital gains (long-term or short-term depending on holding period), in the year the compensation is received (subject to the rules on enhanced compensation below)

Enhanced Compensation: Section 45(5)

It's common for landowners to initially receive a compensation amount, then later receive "enhanced compensation" after a court or tribunal increases the award (sometimes years later, following litigation).

TDS on Compensation: Section 194LA

Particulars	Detail
Applicability	TDS on payment of compensation for compulsory acquisition of immovable property (other than agricultural land)
Threshold	Aggregate compensation exceeding ₹2,50,000 in a financial year (threshold subject to revision)
TDS rate	10%

Since compensation for agricultural land (whether exempt under 10(37) for urban agricultural land, or simply not a capital asset for rural agricultural land) is generally outside the scope of capital gains tax, TDS under Section 194LA typically does not apply to compensation for agricultural land. If TDS has been incorrectly deducted on compensation that is otherwise exempt, the landowner would need to file an ITR to claim a refund of such TDS.

Interest on Compensation

Apart from the compensation itself, landowners often receive interest on delayed payment of compensation (statutory interest under the land acquisition law). This interest is generally taxable as "Income from Other Sources" (not as capital gains), in the year of receipt, and is separate from the capital gains treatment of the principal compensation amount. A partial deduction (commonly 50%) may be available against such interest income under specific provisions dealing with interest on compensation/enhanced compensation.

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Sold agricultural land in a regular sale (not compulsory acquisition)?The exemption rules differ - see the complete picture on how agricultural land sales and income are taxed.

Agricultural Income Tax Guide

2026 current-law quick reference

Finin2min answer: Compulsory-acquisition compensation, enhanced compensation and interest can follow different tax timing/heads; agricultural-land exemption depends on the statutory land/use/status conditions and cannot be assumed from the word “agricultural”.

2026 law transition: FY 2025–26 / AY 2026–27 remains under the Income-tax Act, 1961. Income of the tax year beginning 1 April 2026 is governed by the Income-tax Act, 2025 and the Income-tax Rules, 2026. Use the Department’s official comparison/transition tools before carrying an old section or form number into a post-1-April-2026 transaction.

What changes the answer?

What to check	What to do	Common mistake to avoid
Core classification	Compulsory-acquisition compensation, enhanced compensation and interest can follow different tax timing/heads; agricultural-land exemption depends on the statutory land/use/status conditions and cannot be assumed from the word “agricultural”.	Do not decide from the label used on an invoice, agreement or bank narration alone.
Edge case	Interest awarded on enhanced compensation is not automatically part of the capital-gain exemption.	Recompute when the fact pattern crosses this boundary.
Evidence	Reconcile the documents below to the tax/regulatory return before filing.	A correct legal rule with an unreconciled evidence trail can still fail in assessment or audit.
Effective date	Apply the law/form/rate for the actual transaction, tax year or proceeding date.	Do not mix FY 2025–26/AY 2026–27 legacy references with post-1-April-2026 forms.

Worked practical example

An award pays ₹40 lakh compensation plus ₹3 lakh interest. Classify the compensation and interest separately and document whether the land meets the exemption conditions.

Evidence checklist

acquisition award
land records/use evidence
payment breakup
TDS/AIS
exemption/capital-gain computation

Primary-source checks: Income Tax Department — capital gains guidance · Income-tax Act 2025 transition

How to use this: This current-law summary reflects the latest position. Where it conflicts with an older rate, threshold, form or section reference elsewhere on the page, rely on the current, dated primary source above.

Frequently Asked Questions

The government acquired my family's agricultural land (located within municipal limits) for a highway project in FY 2022-23, and I received enhanced compensation via a court order in FY 2025-26. Is the enhanced amount taxable now? ▼

If your original land qualified for the Section 10(37) exemption (agricultural land in a specified urban area, held and used for agricultural purposes as required, compensation determined for compulsory acquisition), the exemption under Section 10(37) generally extends to enhanced compensation as well, even though it's received in a later year (FY 2025-26) under Section 45(5). The enhanced amount would be assessed in FY 2025-26 as per Section 45(5), but if the underlying transaction qualifies for the 10(37) exemption, the enhanced compensation should also be eligible for the same exemption. It's advisable to maintain documentation establishing the agricultural use and location of the land to support this claim, and consult a Chartered Accountant given the fact-specific nature of this determination.

I received compensation for my non-agricultural plot that was compulsorily acquired for a metro project, and TDS was deducted under Section 194LA. How do I report this in my ITR? ▼

You would compute the capital gain (long-term or short-term, based on your holding period) using the compensation amount as the full value of consideration, less the indexed/non-indexed cost of acquisition and improvement as applicable, and report this under the 'Capital Gains' schedule of your ITR. The TDS deducted under Section 194LA (reflected in your Form 26AS) can be claimed as a credit against your total tax liability for the year. If the TDS exceeds your actual tax liability on this gain (e.g., if you're eligible to claim exemptions like Section 54/54F by reinvesting the compensation), you may be entitled to a refund of the excess.

I received interest on delayed compensation for my acquired land. Is this interest taxed the same way as the compensation itself? ▼

No. Interest received on compensation (or enhanced compensation) for compulsory acquisition is generally taxed as 'Income from Other Sources' in the year of receipt - it is treated separately from the capital gains computation on the compensation principal. A deduction (commonly understood to be 50% of such interest income) may be available under specific provisions dealing with interest on compensation/enhanced compensation, effectively taxing only the remaining portion. This interest income and its treatment is distinct from whether the underlying compensation itself is exempt (e.g., under Section 10(37)) - exemption of the principal compensation does not automatically exempt the interest received on it.

⚠ This article is for general informational purposes only and does not constitute tax or financial advice. Exemptions under Sections 10(37) and 45(5), TDS under Section 194LA, and the classification of agricultural land are governed by the Income Tax Act and subject to interpretation based on specific facts (location, land use, holding period). Please consult a qualified Chartered Accountant before relying on any exemption for compensation received on compulsory land acquisition.

Source and review trail

Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.

Primary category: Income Tax
Official starting point: www.incometax.gov.in

Page source links

The prior page did not embed a page-specific external source. The category authority above is the minimum verification starting point; a specific instrument should be added when available.

Primary sources & related provisions

Statutory provisions referenced in this guide: