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The 2-Minute Summary
When the government or any authority acquires your land or building through compulsory acquisition under any law, the compensation paid to you attracts TDS at 10% if the total compensation exceeds Rs. 5 lakh. This ensures that large land acquisition payments are captured in the tax system.
However, there is a significant exemption. Acquisitions under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR Act) are exempt from TDS if the compensation qualifies for exemption under Section 96 of that Act.
Example: NHAI acquires Vinod’s land under a highway-specific law and pays Rs. 30 lakh as compensation. TDS = 10% = Rs. 3 lakh is deducted before payment.
Example: If the same acquisition is conducted under the LARR Act 2013 and compensation qualifies as exempt under Section 96 of that Act, no TDS applies regardless of the amount.
Under Income Tax Act 1961: Section 194LA of the Income Tax Act 1961. Now Section 393(1) Sl. No. 3(iii) of the Income Tax Act 2025. Rate and exemption unchanged.
At a Glance
| Item | Details |
| New Act Reference | Section 393(1), Sl. No. 3(iii) of Income Tax Act 2025 |
| Old Act Reference | Section 194LA of Income Tax Act 1961 |
| Who Deducts | Any person responsible for paying the compensation |
| Rate | 10% |
| Threshold | Rs. 5,00,000 |
| Key Exemption | No TDS if acquisition is under LARR Act 2013 and compensation is exempt under Section 96 of that Act |
| Urban Agricultural Land | Covered under Sl. 3(iii) per Section 402(2)(b) of the Act |
| When to Deduct | At time of payment of compensation |
| Form for TDS Certificate | Form 16A |
| TAN Required | Yes |
What is Covered
Sl. 3(iii) applies to any sum paid as compensation on account of compulsory acquisition under any law for the time being in force, of any immovable property.
Section 402(2) of the Act defines ‘agricultural land’ separately for each sub-entry of Sl. 3:
- For Sl. 3(i) (property purchase): agricultural land means land NOT situated in any urban area referred to in Section 2(22)(iii). So urban agricultural land is excluded from Sl. 3(i).
- For Sl. 3(iii) (compulsory acquisition): Section 402(2)(b) states that agricultural land includes land situated in any area referred to in Section 2(22)(iii). So urban agricultural land is included in Sl. 3(iii).
This distinction is important. Rural agricultural land is generally not covered under Section 2(22)(iii). Whether TDS applies on its compulsory acquisition compensation depends on the specific facts and whether it qualifies as immovable property under the provision. In practice, the LARR Act exemption (discussed below) covers most large-scale rural land acquisitions anyway.
The LARR Act Exemption
Section 393(4) Table Sl. No. 3 provides a critical exemption. TDS under Sl. 3(iii) is not required if the compensation is by way of an award or agreement which has been exempted from levy of income tax under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
Section 96 of the LARR Act 2013 provides that income tax shall not be levied on compensation amounts received under that Act. This exemption is recognised and incorporated into the TDS framework.
The key point: not all acquisitions are under the LARR Act. Acquisitions under sector-specific laws for highways, railways, defence, or special economic zones may not automatically qualify. In those cases, TDS applies if compensation exceeds Rs. 5 lakh, unless a specific exemption applies.
Threshold: Rs. 5 Lakh
The threshold is Rs. 5,00,000. Where compensation is Rs. 5 lakh or below, no TDS is required. Once it exceeds Rs. 5 lakh, TDS at 10% applies on the entire compensation amount, not just the excess.
Example: Rekha receives Rs. 4.8 lakh as compensation for her land acquired by the state government. Since the amount is below Rs. 5 lakh, no TDS is deducted.
Example: Her neighbour receives Rs. 12 lakh for a larger parcel under the same acquisition order. TDS = 10% on Rs. 12 lakh = Rs. 1.2 lakh.
Capital Gains on Compulsory Acquisition
TDS deducted under Sl. 3(iii) is only an advance tax. The landowner must still compute capital gains on the compensation received and declare it in their ITR. The TDS paid is credited against the final tax liability.
If the acquisition is under the LARR Act and is fully exempt, there is no capital gains tax either. For all other acquisitions, the normal capital gains provisions apply with indexation benefits available since the property was held compulsorily (not voluntarily sold).
Practical Compliance Checklist
- If your land or property is being compulsorily acquired: ask the acquiring authority under which specific law the acquisition is being made. If it is under the LARR Act 2013, verify whether your compensation qualifies as exempt under Section 96 of that Act. If yes, no TDS should be deducted.
- If TDS is deducted from your compensation: collect Form 16A from the acquiring authority. Claim the TDS credit in your ITR. Also compute capital gains on the compensation received and pay any balance tax.
- If you are an acquiring authority: verify the applicable law before deciding on TDS. Incorrectly omitting TDS on non-LARR acquisitions creates interest liability and penalty exposure.
- Compensation above Rs. 5 lakh always attracts TDS at 10% unless the LARR Act Section 96 exemption specifically applies.
Compulsory acquisition compensation can run into crores for large landholdings. The 10% TDS is a significant amount for landowners. Understanding whether the acquisition is under the LARR Act and whether the Section 96 exemption applies is therefore critical before accepting any compensation payment.
