The central Board of Direct Taxes (CBDT) has clarified that the compensation received against acquisition (Including compulsory acquisition) of non-agricultural land is exempt from the levy of taxes. This amendment has settled the long standing issue of Taxability of Compensation Received for Compulsory Acquisition of Non Agricultural Land
Under section 96, inter-alia of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation, and Resettlement Act 2013 (RFCTLARR ACT) such an exemption has been awarded for the for the agreements made for such compensations (with the exception of compensation awarded under section 46 of the act).
The Finance Ministry on October 25, 2016 vide circular no 36/2016 through RFCTLAAR ACT has exempted the capital gains tax assessment on all types of land and any type of acquisition.
Taxability of Compensation Received for Compulsory Acquisition of Non Agricultural Land- Issue settled after instructions by CBDT
The REFCTLAAR ACT came into effect from January 1st, 2014 tax exemption has a wider scope as compared to the tax exemption offered by the existing income tax act of 1961. The current act does not make any distinction between the compulsory acquisition of agricultural land and non-agricultural land.
Such a lack of distinction between the compulsory acquisition of land (agricultural and non-agricultural) for imposing taxes has created confusion, which required further investigation by the central board and clarified via section 96 that such compensation be excluded for calculation of the taxes.
Before this Amendment, Income Tax Officers were taxing the compensation on acquisition of agriculture land in urban areas
The Income Tax Act provides that compensation agreements made in respect to the acquisition of agricultural land situated in non-specified area is not considered capital gains and hence are not eligible for levy of taxes.
As such, compensation received on sale or even compulsory acquisition of agricultural land situated in the specified area and non-agricultural land situated in specified or the non-specified areas were subject to capital gains tax under the existing provisions of the Income Tax Act.
Amendments to the Income Tax Act for Exemptions on Capital Gains
An amendment was made to the Income tax act by including finance act (No 2) under section 10(37) offering exemptions to the individual or HUF on capital gains against compulsory acquisition of agricultural lands located in the specified area, subject to certain conditions.
Section (37) of the ITA act states that an individual or Hindu Undivided family can claim exemption from capital gains in case of transfer of ownership of such land
Where in such land is situated in the specified area as mentioned in sub-clause (3) of clause (14) of section 2, and has been used for agricultural purpose in the preceding two years, (preceding the transfer of ownership)
Such transfer of ownership happens with the rules as prescribed by the central government or Reserve Bank of India, and is a compulsory transfer. Finally, the compensation for such transfer received on 1st of April 2004 or after.
Exceptions Made in the RFCTLAAR ACT
RFCTLAAR ACT clears the confusion in the treatment of compensation awarded in case of compulsory acquisition of non-agricultural land.
When an individual, other than any specified individual, through negotiation purchases land of specified area as prescribed by the government, after consider various factors by the local governments, for which fair compensation is required, the individual shall apply to the district magistrate stating the intention of such purchase, and such other details of the purchase.
The collector then shall forward such application to the commissioner of rehabilitation and resettlement. Upon the approval from the commissioner, the collector shall award the compensation.
The rules for awarding compensation is strictly in compliance with the rules prescribed by the commissioner of rehabilitation and resettlement, any purchase that does not satisfy the rehabilitation and resettlement shall be void.
Any such compensation awarded does not constitute capital gains for the calculation of income tax as per the new amendment under RFCTLAAR.