Section 194LA: TDS on Compensation for Compulsory Acquisition of Immovable Property

Section 194LA of the Income Tax Act, 1961, requires any person (referred to as the “payer”) making a payment to a resident (the “payee”) for the compulsory acquisition of immovable property to deduct TDS. This applies to compensation paid when the government or an authorized body acquires land or property for public purposes, such as infrastructure projects, roads, or urban development.

However, this section does not apply to all types of immovable property. Agricultural land, both rural and urban, enjoys specific exemptions.

What is Compulsory Acquisition?

Compulsory acquisition refers to the process where immovable property is acquired by the government or an authorized entity under a legal mandate, often against the owner’s will. This could happen under laws like the Land Acquisition Act, 1894, or its successor, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The compensation amount—the payment made to the property owner—may be determined by the central government, state government, or another designated authority.

TDS Rate & Threshold Limit

• TDS Rate: 10% on the compensation amount.
• If the payee fails to provide a PAN, the TDS rate may increase to 20%.
• Threshold Limit: With effect from April 1, 2025, the threshold for TDS deduction has been increased from ₹2,50,000 to ₹5,00,000. No TDS deduction is required if the compensation amount does not exceed the threshold limit.

Who Deducts TDS?

The “payer” under Section 194LA will be the government or an authorized body —responsible for making the payment. The deduction happens at the time of actual payment, not when the liability arises or an agreement is signed. So, whenever the payee receives the compensation, the payer must deduct the TDS and deposit it with the government.

What Payments Are Covered?

Section 194LA applies to various types of payments related to compulsory acquisition, including:

1. Compensation: The initial amount paid for the acquired property.
2. Enhanced Compensation: Additional amounts awarded later, often after legal disputes. For instance, if a property owner challenges the initial compensation in court and wins a higher amount after years of litigation (say, 2-5 years), this extra payment is termed “enhanced compensation.”

However, there’s a catch with interest. If the enhanced compensation includes an interest component (e.g., for delays in payment), the TDS on that interest portion is deducted under Section 194A (TDS on interest other than interest on securities), not Section 194LA. This distinction is crucial for proper tax compliance.

Who Receives the Compensation?

The resident individual or entity whose land or property is compulsorily acquired under the relevant law.

Exemption for Agricultural Land

Not all immovable property falls under Section 194LA. Agricultural land is explicitly excluded, but the exemption depends on its type:

• Urban Agricultural Land: If compulsorily acquired, compensation for urban agricultural land is exempt from tax under Section 10(37) of the Income Tax Act, provided certain conditions are met (e.g., the land was used for agriculture by the owner or their family for two years before acquisition). Consequently, no TDS applies under Section 194LA.
• Rural Agricultural Land: This doesn’t even qualify as a “capital asset” under Section 2(14) of the Act, meaning it’s outside the scope of Section 194LA entirely.

Exemptions to 194LA:

• No TDS is to be deducted where the payment is made in respect of any award or agreement which has been exempted from income tax under section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
• Payments made for the compulsory acquisition of agricultural land are also exempt from TDS under this section.