Section 194LA: Payment of Compensation on acquisition of certain immovable property

Section 194LA: Payment of Compensation on acquisition of certain immovable property

With effect from 1^st October 2004, new section 194LA was inserted into the Income Tax Act, 1961. Section 194LA relates to the TDS provisions applicable on the payment of compensation at the time of acquisition of certain type of immovable property.

The present article emphasizes the provisions of section 194LA of the Income Tax Act in brief.

Important definitions – 

Before understanding the provisions of section 194LA, it is vital to understand the definitions of ‘immovable property’ and ‘agricultural land’ which are explained here under –

The definition of the term ‘immovable property’ has been provided under Explanation (ii) to section 194LA. Accordingly, immovable property means any land (except agricultural land) or any building or part of a building. It should be noted that the TDS provisions prescribed under section 194LA applies to compulsory acquisition of any immovable property except agricultural land.

Now, since agricultural land is exempted under section 194LA understanding the definition of the same is very important. The definition of the term ‘agricultural land’ has been provided under Explanation (i) to section 194LA. Accordingly, agricultural land means agricultural land in India including land situated in areas referred to in section 2 (14) (iii) (a) and section 2 (14) (iii) (b).

Circumstances when provisions of section 194LA of the Income Tax Act, 1961 attracts –

The payer is liable to deduct TDS under section 194LA if the following conditions are satisfied –

• Any person is paying any sum to a resident person;
• The sum is paid in the nature of compensation / enhanced compensation / consideration / enhanced consideration on account of compulsory acquisition of the immovable property (other than agricultural land);
• The compulsory acquisition is made under any law for the time being in force; and
• The aggregate amount of payment during the financial year exceeds INR 2,50,000.

Time of Tax Deduction under section 194LA

If the above-mentioned circumstances are satisfied and the person is liable to deduct TDS under section 194LA, then, the person is required to deduct TDS within earlier of the below mentioned dates –

• At the time of payment of the amount in cash; or
• At the time of payment of the amount in cheque or draft or any other mode.

Rate of Tax Deduction under section 194LA

The Deductor is liable to deduct TDS @ 10% under section 194LA of the Income Tax Act, 1961. No additional Surcharge, Education Cess or SHE Cess is to be added over and above the TDS rate of 10%.

However, in case the Deductee doesn’t furnish PAN, then, the Deductor would be liable to deduct TDS at the Maximum Marginal Rate of 20%.

Cases, wherein, TDS is not to be deducted under section 194LA

TDS is not deductible under section 194LA in following cases –

• When the person is paying an amount to a ‘non-resident’ person.
• When the aggregate consideration during the Financial Year is less than INR 2,50,000.
• When the payment is made in respect of any award / agreement which is exempted from income tax under section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
• When the payee has filed an application in Form No. 13 to the Assessing Officer and has obtained a certificate for No / lower deduct of tax.

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