Compulsory acquisition is the power of government to acquire private rights in land without the willing consent of its owner or occupant in order to benefit society. Compensation against such acquisition is provided to the assessee by the government. On occurrence of such transactions capital gain is to be computed as per the provisions of Income Tax Act. Section 45 of the act deals with situations which are not actual transfer but are deemed to be transfer of capital asset.

Section 45(5) specifically deals with compulsory acquisition of capital assets. The conditions to be satisfied by any transaction to fall under this section are as follows: –

√ Compulsory acquisition has taken place

√ Compulsory acquired asset must be capital asset

√ Compensation thereof has been determined or approved by Central Government or the Reserve Bank of India

√ Any court, Tribunal or other authority has the right to enhance the compensation, if necessary.

Conceptual hand writing showing Capital Gains

As per section 2(14) “capital asset” means—

(a) property of any kind held by an assessee, whether or not connected with his business or profession;

(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992,

but does not include—

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;

(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

(iii) agricultural land in India,[Therefore Capital gains arising on compulsory acquisition of such agricultural land is exempt under section 10(37)]

(iv) 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

(v) Special Bearer Bonds, 1991, issued by the Central Government ;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 8[or deposit certificates issued under the Gold Monetisation Scheme, 2015] notified by the Central Government.

Treatment of Income Received on Compulsory Acquisition

There can be two phases of income being received in this case, and their treatment has been explained below.

1) Capital Gain on Consideration Received on First Instance

Initial compensation is chargeable to tax in the previous year in which such compensation (or part thereof) is first received. Further, for computing capital gain, initial compensation is taken as full value of consideration. From the full value of consideration, amount applicable as per section 48 should be deducted to arrive at the value of capital gain.

In a case when full amount of compensation has been determined, but only partial amount thereof has been received, cost of acquisition should also be considered to that extent only.

For example:

Actual consideration of a land in 2001-02 is Rs. 76,000. The land was compulsorily acquired and the full value of consideration decided by Government was Rs. 15,00,000 in F.Y. 2019-20, but actual amount received in 2019-20 is only Rs. 7,15,000. In such case the capital gain will be calculated as follows: –

Full Value of Consideration                  7,15,000

Less: Cost of Acquisition (W.N.1)       (1,04,695)

Capital Gain/Loss                                 6,10,304

Working Note 1

76,000*289/100 = 2,19,640

Now, taking proportionate amount of indexed cost,

2,19,640 *7,15,000/15,00,000 = 1,04,695

2) Capital Gain When Enhanced Compensation Has Been Received

Enhanced compensation shall also be taxable in the year of receipt. The cost of acquisition and the cost of improvement shall be taken as nil in such case. Litigation expenses for getting the compensation enhanced are deductible as expenses on transfer. If the enhanced compensation is received by any other person due to death of the transferor or any other reason, it would be taxable as income of the receipient.

In case of enhanced compensations received on compulsory acquisition of capital asset, interest is also paid to the assessee for delayed payment. Such interest would be taxable in the year of receipt as per section 145A. Interest income on enhanced compensation is taxable under section 56(2)(viii) but under virtue of section 57(iv), 50% of amount is allowed as deduction from such income.

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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18 Comments

  1. P.L. Jain says:

    My industrial land was compulsory acquired by NHAI in 2017. This land is situated in rural area. Award received in 2019. Is capital gain exempted for this acquisition under section 96 of RFCLCTAAR ACT 2013.

  2. PARAS CHHAJED says:

    An assessee partnership firm has received compensation for land acquired by state government which as per section 96 of The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 is not liable to income tax. The asset acquired was forming part of stock in trade of the assessee therefore the compensation has been credited to profit and loss account. Please guide how to disclose the same and claim exemption while filing ITR 5 of the firm. Thanks

  3. shekhar dhapodkar says:

    i received enhanced compensation from Govt. for compulsory acquisition of Agriculture land in rural area then tell me its exempt income and in which ITR has been filled for this

  4. Rohan Garg says:

    Kindly refer Notification No. 36/2016 dated 25.10.2016 , because as per the said notification All types land whether Agriculture or Non-Agriculture shall be exempt from Income Tax .

    1. MURALI KRISHNA PAGADALA says:

      Kindly refer Notification No. 36/2016 dated 25.10.2016 , because as per the said notification All types land whether Agriculture or Non-Agriculture shall be exempt from Income Tax .

  5. SHEETAL KAPOOR says:

    i waant to know if residential land is acquired by govt for expansion of heritage sites……… wat shall be the rule in such a case of capital gain

  6. Ankur says:

    compulsory acquisition of building is exempt under N/N 36/2016, if land is another person name and building is another person name??????

  7. Aurowill says:

    I have a doubt regarding period of holding.
    If the asset was purchased in the year 2000-01 and compulsory acquisition made by govt in year 2008-09 and the award order was passed in the year 2009-10 but payment received in the year 2017-18.
    Please suggest me about how to take indication benefit. How to consider period of holding?

  8. kalyan says:

    suppose father gets compensation on compulsory acquisition of land and after that he transfers compensation amount to his son, what will be the tax treatment in part of his son? Please suggest.

  9. PARAS CHHAJED says:

    Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 provides for exemption form income tax for all compensation against compulsory acquisition of land whether rural or urban and whether agricultural or non-agricultural to all assessees irrespective of status whereas s. 10(37) of Income Tax Act, 1961 provided for exemption to Individuals and HUFs only for agricultural land. This provision is a special provision. There should not be any TDS also form compensation for compulsory acquisition of land.

    1. atul kumar says:

      whether the compensation received through award from railway on compulsory acquisition of building constructed on the land(means land and building) is taxable.
      this property was acquired under the Railway Amendment Act 2008(20)F and the award was made under the Land Acquisition Act 2013

    2. atul kumar says:

      whether the compensation received through award from railway on compulsory acquisition of building constructed on the land(means land and building) is taxable.
      this property was acquired under the Railway Amendment Act 2008(20)F and the award was made under the Land Acquisition Act 2013.

  10. Brinda shah says:

    I took such a view because, in case we consider the whole amount in that year then we would not be able to get the benefit of indexation of further years. That is, if I calculate in F.Y. 2015-16 whole capital gain I will take the indexed cost as in 15-16 for whole amount. Further, if I receive the balance amount in 2019-20, I would not be able to get benefit of indexation using that years index, as it has already been calculated. So calculation on basis of receipt would be beneficial for assessee. In no ways I am saying that I am right or someone is wrong. This just my opinion.

  11. Poornima says:

    Are you sure initial compensation (received in parts) is taxable only to the extent it is received during any year? Because, authors like Vinod Singhania has said it the other way in their book. That is, full value of initial compensation is taxable in the year of 1st receipt (even if received in parts).

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