Section 194LA of ITA, 1961 : Section 194La: Payment Of Compensation On Acquisition Of Certain Immovable Property

Explanation using Example

Imagine a scenario where a local government authority decides to build a new highway and needs to acquire land that includes a portion of Mr. Sharma's property. Mr. Sharma's property is not agricultural land. The government determines that Mr. Sharma should be compensated for the land acquisition and agrees to pay him a sum of ₹3,00,000 as compensation.

Under Section 194LA of the Income-tax Act, 1961, the authority, before making the payment to Mr. Sharma, is required to deduct 10% of the compensation amount as income tax. Therefore, the authority will deduct ₹30,000 (which is 10% of ₹3,00,000) and pay the remaining ₹2,70,000 to Mr. Sharma. This tax deduction at source (TDS) is applicable because the compensation exceeds the threshold of ₹2,50,000.

If, however, the compensation had been ₹2,50,000 or less, the authority would not have needed to deduct any tax at source according to the first proviso of Section 194LA.

Furthermore, if Mr. Sharma's compensation were under an award or agreement exempted from income tax under section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, then no TDS would be deducted regardless of the compensation amount, as per the second proviso of Section 194LA.