The Finance Bill, 2026 proposes to expressly exempt income arising from the compulsory acquisition of any land under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act), aligning the Income-tax law with existing statutory intent. While section 96 of the RFCTLARR Act already provides that no income tax shall be levied on compensation awarded under the Act (except under section 46), ambiguity existed due to the absence of a specific exemption in the Income-tax framework. This was earlier clarified administratively by CBDT Circular No. 36/2016. To remove uncertainty, Schedule III to the Income-tax Act, 2025 is proposed to be amended to grant a clear statutory exemption for income arising from any award or agreement relating to compulsory land acquisition under the RFCTLARR Act, excluding section 46 cases. The amendment applies to acquisitions carried out on or after 1 April 2026 and will take effect from tax year 2026–27 onwards.
Exemption of income on compulsory acquisition of any land under the RFCTLARR Act.
Existing Section 11 read with Schedule III of the Act provides exemption to certain eligible persons on their total income. The said Schedule inter alia provides exemption to an individual or a Hindu undivided family on any income chargeable under the head “capital gains” arising from the transfer of agricultural land subject to the conditions specified therein.
2. Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) inter alia provides that income-tax shall not levied on any award or agreement made (except those made under section 46) under the said Act.
3. In order to resolve any ambiguity, CBDT vide Circular No.36/2016 clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of Income-tax Act, 1961 even if there are no specific provisions of exemption for such compensation in the Income-tax Act, 1961.
4. In order to align the provisions of the Act with the RFCTLARR Act it is proposed to amend the said Schedule to provide exemption on any income in respect of any award or agreement made on account of compulsory acquisition of any land, carried out on or after the 1st April, 2026, under the RFCTLARR Act (other than the award or agreement made under section 46 of said Act).
5. These amendments will take effect from the 1st day of April, 2026 and shall accordingly, apply in relation to the tax year 2026-27 and subsequent tax years.
[Clause 108]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 108 of the Bill seeks to amend Schedule III to the Income-tax Act, 2025 relating to income not to be included in total income of eligible persons.
It is proposed to amend the Table in the said Schedule so as to provide an express statutory exemption in respect of disability pension, including both the service element and the disability element, in cases where an individual has been invalided out of service on account of such disability attributable to, or aggravated by, such service. However, the said exemption shall not be available where the individual has retired from service on superannuation or otherwise.
It is further proposed to amend the Table in the said Schedule so as to provide exemption to an individual or his legal heir, on any interest awarded on compensation under the Motor Vehicles Act, 1988.
It is proposed to amend the said Schedule so as to provide exemption on any income in respect of any award or agreement made on account of compulsory acquisition of any land, carried out on or after the 1st April, 2026 under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (other than the award or agreement made under section 46 of said Act).
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
- Amendment of Schedule III.
In Schedule III to the Income-tax Act, in the Table, after serial number 38 and the entries relating thereto, the following shall be inserted, namely:—
| A | B | C | D |
| 38A. | Disability Pension received (including service element and disability element). | An individual who has been a member of the armed forces (including paramilitary forces) of the Union. | (a) The individual has been invalided out of service in the armed forces on account of bodily disability attributable to, or aggravated by such service; and
(b) the individual has not retired on superannuation or otherwise. |
| 38B. | Any interest on compensation amount awarded by Motor Accident Claims Tribunal. | An individual or his legal heir. | Such interest is received under the Motor Vehicles Act, 1988 (59 of 1988). |
| 38C. | Any income in respect of any award or agreement made on account of compulsory acquisition of any land. | An individual or a Hindu undivided family. | Such award or agreement is made under the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (30 of 2013), except under section 46 of the said Act. |
