Section 194LA: TDS on Compensation for Compulsory Acquisition of Property
Section 194LA governs tax deduction at source (TDS) on compensation or enhanced compensation paid to a resident for compulsory acquisition of certain immovable property. The provision excludes agricultural land and payments covered by the statutory exemption under section 96 of the land acquisition legislation. This guide explains the applicable rate, threshold, definitions, timing and practical compliance.
Applicable-law note: Section 194LA of the Income-tax Act, 1961 governed payments through 31 March 2026. From 1 April 2026, the corresponding TDS rules are contained in section 393 of the Income-tax Act, 2025. The Income Tax Department states that the substantive TDS rates and thresholds were retained under the new Act; the correct 2025 Act table entry must be used in filings for new-Act payments.
1. Scope of Section 194LA and statutory definitions
Any person responsible for paying compensation, enhanced compensation, consideration or enhanced consideration to a resident on compulsory acquisition under a law in force of immovable property (other than agricultural land) must deduct tax, subject to the threshold and statutory exemptions. This includes payments by acquiring authorities and other persons responsible for disbursing such compensation.
Immovable property for this section means land other than agricultural land, or a building or part of a building. Agricultural land means agricultural land in India, including land situated in areas mentioned in section 2(14)(iii)(a) and (b) of the 1961 Act. This special definition is broader than the capital-gains distinction between rural and urban agricultural land.
The section applies to compulsory acquisition, not an ordinary negotiated property sale. A normal purchase from a resident may instead attract the separate provisions formerly in section 194-IA, depending on its conditions.
2. TDS rate, threshold and deduction timing
| Condition | Rule under Section 194LA |
|---|---|
| Applicable TDS rate | 10% of taxable compensation / enhanced compensation |
| Threshold from 1 April 2025 | No TDS if the payment or aggregate payments to the resident in the financial year do not exceed Rs. 5,00,000 |
| Earlier threshold | Rs. 2,50,000 before 1 April 2025 |
| Time of deduction | At the time of payment by cash, cheque, draft or any other mode, whichever occurs first |
| Payee | Resident recipient; non-resident payments require separate examination of applicable withholding provisions |
The Rs. 5 lakh figure is a threshold, not a tax-free slab: when the applicable annual aggregate exceeds it, TDS is calculated on the amount subject to deduction, not merely on the excess. Compensation received in instalments must be tracked on a payee-wise financial-year basis.
3. Agricultural land and RFCTLARR Act exemptions
Agricultural land
Compensation for compulsory acquisition of agricultural land in India is outside the scope of section 194LA, even if the land lies in an urban area. This does not by itself decide the ultimate capital-gains tax treatment; the exemption and taxability of the receipt should be assessed separately.
Section 96 of the RFCTLARR Act, 2013
No deduction is required where payment is made in respect of an award or agreement exempt from income tax under section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The applicability of section 96 and any exclusions under the acquisition framework must be checked against the award and governing legislation.
Where compensation is exempt, the absence of TDS does not need to depend on the Rs. 5 lakh threshold. Conversely, deduction of TDS does not automatically establish that the entire receipt is finally taxable.
4. Practical TDS illustrations
| Illustration | Indicative TDS |
|---|---|
| Resident receives Rs. 4,80,000 taxable compensation during the financial year | Nil: annual amount does not exceed Rs. 5 lakh |
| Resident receives Rs. 8,00,000 taxable compensation for compulsory acquisition of non-agricultural land | Rs. 80,000 at 10%, assuming no exemption or different lawful rate |
| Compensation of Rs. 12,00,000 is exempt under section 96 of the RFCTLARR Act | Nil under the specific statutory exclusion |
| Compensation paid for qualifying agricultural land in India | Nil under section 194LA |
Examples are illustrative. PAN availability, a valid lower/nil deduction certificate, recipient status and other applicable rules can affect actual withholding.
5. Deductor compliance and documentation
- Verify whether the acquisition is compulsory, the property is covered and the recipient is resident.
- Obtain the award, compensation statement, land classification and documents supporting any section 96 exemption.
- Aggregate relevant payments to the same recipient during the financial year and apply the applicable threshold.
- Deduct TDS at payment, deposit it within the prescribed time, file the applicable TDS statement and issue the relevant TDS certificate under the governing rules.
- Check PAN and any valid certificate for lower or nil deduction. Under the 1961 Act, section 206AA could affect the rate where PAN was not furnished.
For payments under the 1961 Act, normal non-salary TDS reporting generally used Form 26Q and certificates in Form 16A, as applicable. For payments from April 2026, consult the current 2026 rules and e-filing portal for the prescribed statements and section 393 classification.
6. Income-tax Act, 2025: transition from April 2026
The Income-tax Act, 2025 became applicable to payments made on or after 1 April 2026. The Income Tax Department explains that non-salary TDS provisions have been consolidated in section 393 and that the applicable table item, rather than the former section number, should be quoted in new-Act TDS returns. For payments up to 31 March 2026, the 1961 Act continues to govern the relevant withholding event.
The core treatment for qualifying compulsory-acquisition compensation remains a 10% rate and Rs. 5 lakh threshold, subject to statutory exclusions. Verify the precise section 393 table item and the current Finance Act before reporting a transaction.
7. Frequently asked questions
Is TDS deducted on agricultural land acquisition compensation?
No TDS arises under section 194LA on compulsory acquisition of agricultural land in India as defined for that provision.
What is the TDS threshold from 1 April 2025?
Rs. 5 lakh in a financial year per resident recipient. The earlier threshold was Rs. 2.5 lakh.
Is TDS deducted when compensation is credited but not paid?
Section 194LA specifically links deduction to payment, unlike many TDS provisions that apply on credit or payment, whichever is earlier.
Does section 194LA apply to a voluntary sale of property?
No. It concerns compulsory acquisition under law. Ordinary property transfers may fall under different TDS provisions.
Is all compensation taxable if TDS is deducted?
Not necessarily. The final tax treatment depends on the nature of the land, applicable capital-gains provisions and any available exemptions.
8. Official legislation and guidance
- Income Tax Department: Section 194LA (2025 amended text)
- Finance Act 2025: official amendment highlights
- Income Tax Department: TDS compliance and transition to the 2025 Act
- Income Tax Department: resident TDS exemptions and thresholds
- India Code: central legislation, including the RFCTLARR Act, 2013
Last reviewed: 27 October 2026. This is general legal information; apply the law and notifications relevant to the date and facts of the particular payment.