No need to pay income tax if your land is acquired by government giving payout under RFCTLARR Act; Budget 2026 proposal
Feb 4, 2026
Synopsis
Budget 2026 has introduced a full income tax exemption for compensation received from the government for land acquired under the RFCTLARR Act, effective April 1, 2026. This move aims to align tax laws with the RFCTLARR Act, removing previous interpretational ambiguities regarding tax-free payouts for compulsory land acquisitions. Read more.
Budget 2026 has given income tax exemption for any compensation received from the government under the compulsory land acquisition method under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCTLARR) Act.
The RFCTLARR Act, 2013, came into force from January 1, 2014. This Act replaced the earlier 1894 Act and ensured a fair compensation for lands compulsorily acquired by the government under this Act.
The government needs lands to carry out development activities and this Act helps landowners by offering them a fair compensation, transparent process and rehabilitation if affected by this acquisition.
Budget 2026 said:
In order to align the provisions of the Act with the RFCTLARR Act it is proposed to amend the said Schedule to provide exemption on any income in respect of any award or agreement made on account of compulsory acquisition of any land, carried out on or after the 1st April, 2026, under the RFCTLARR Act (other than the award or agreement made under section 46 of said Act).
These amendments will take effect from the April 1, 2026 and shall accordingly, apply in relation to the tax year 2026-27 and the subsequent tax years.
How does this Budget amendment impact landowners whose land has been compulsorily acquired by the govt?
Chartered Accountant (Dr.) Suresh Surana said to ET Wealth Online: As per Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act’), any income arising from the award or agreement made under this Act (including capital gains) is exempt from income tax, which includes capital gains tax.
Surana says that as such, compensation received for compulsory acquisition of land under the RFCTLARR Act (except those made under section 46 of RFCTLARR Act), is exempted from the levy of income-tax.
This tax exemption was supported by CBDT Circular No. 36/2016, dated October 25, 2016, which clarifies that compensation received for the compulsory acquisition of land under the RFCTLARR Act is not chargeable to tax under the Income Tax Act.
Although section 96 of the RFCTLARR Act provides that no income-tax shall be levied on any award or agreement made under that Act (other than cases covered under section 46), the absence of a specific exemption provision under the income-tax legislation had earlier given rise to interpretational issues.
To remove any residual ambiguity and align the Income-tax Act, 2025 with the RFCTLARR Act, the Budget 2026 proposes to amend Schedule III to the Income-tax Act, 2025 to provide an explicit exemption for any income arising from an award or agreement on account of compulsory acquisition of land, other than cases falling under section 46 of the RFCTLARR Act.
Surana says that as a result of this amendment, landowners whose land is compulsorily acquired by the Government will have clear legislative assurance that compensation and related income received with respect to such acquisition will not be chargeable to income-tax, thereby eliminating reliance on circulars or interpretational positions.
Taxmann research says that under the existing provisions of Section 11 read with Schedule III of the Income Tax Act, 2025 (which corresponds to Section 10(37) of the Income Tax Act, 1961], tax exemption is available to an individual or a HUF regarding capital gains arising from transfer of agricultural land by compulsory acquisition under any law, subject to specified conditions.
However, so long the Income-tax Act did not expressly provide an exemption on income arising from compulsory acquisition of land under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act).
Although Section 96 of the RFCTLARR Act provides that no income tax shall be levied on any award or agreement made under that Act (other than those covered by Section 46), the absence of a specific exemption provision in the Income-tax law led to interpretational issues, which were addressed through CBDT Circular No. 36/2016 under the Income Tax Act, 1961.
Taxmann research says: “To align the Income Tax Act, 2025 with the provisions of the RFCTLARR Act and remove any ambiguity, it is proposed to amend Schedule III to provide an explicit exemption for any income arising from an award or agreement on account of compulsory acquisition of any land under the RFCTLARR Act, other than cases covered under Section 46 of that Act.”
[The Economic Times]
