Clause 108 of the Finance Bill, 2026 proposes an amendment to Schedule III of the Income-tax Act, 2025, which specifies categories of income that shall not be included in total income of eligible persons.
The amendment seeks to provide a clear and express statutory exemption for 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), thereby aligning the Income-tax Act with the land acquisition law.
Position under the Existing Law
Income-tax Act, 2025
- Section 11 read with Schedule III of the Income-tax Act, 2025 provides exemptions for specified incomes that are not to be included in total income.
- Schedule III already contains exemptions for certain capital receipts, including capital gains arising from transfer of agricultural land in specified cases.
- However, there was no explicit provision in Schedule III exempting compensation received on compulsory acquisition of land under the RFCTLARR Act.
RFCTLARR Act, 2013
- Section 96 of the RFCTLARR Act, 2013 provides that “No income-tax shall be levied on any award or agreement made under this Act, except awards or agreements made under section 46″.
- Section 46 deals with acquisitions for private companies, where compensation is governed by a different contractual framework.
CBDT Clarification and Resulting Ambiguity
To bridge the absence of a specific exemption under the Income-tax Act, the CBDT issued Circular No. 36/2016, clarifying that:
- Compensation received pursuant to awards or agreements exempted under section 96 of the RFCTLARR Act
- shall not be taxable, even if the Income-tax Act did not explicitly provide for such exemption.
While this circular provided relief, the exemption rested on administrative clarification, leaving scope for interpretational disputes.
What Clause 108 of Finance Bill 2026 Proposes
Clause 108 seeks to remove all ambiguity by amending Schedule III of the Income-tax Act, 2025 to expressly provide that:
- Any income arising from any award or agreement
- made on account of compulsory acquisition of any land
- under the RFCTLARR Act, 2013
- shall not be included in total income, and hence shall be exempt from income-tax
Important Carve-out
- The exemption shall not apply to awards or agreements made under section 46 of the RFCTLARR Act.
Scope and Coverage of the Exemption
- Applies to all income arising from compulsory land acquisition
- Covers compensation awarded or agreed under the RFCTLARR Act
- Operates independently of the head of income under which such receipt might otherwise fall
- Statutorily aligns the Income-tax Act, 2025 with section 96 of the RFCTLARR Act
Effective Date
- Effective from: 1 April 2026
- Applicable for: Tax Year 2026-27 and subsequent tax years
- Applies to awards or agreements made on or after 1 April 2026
Practical Implications
- Eliminates litigation and uncertainty on taxability of land acquisition compensation
- Removes dependence on CBDT circulars and judicial interpretation
- Provides certainty to landowners and affected persons
- Ensures full receipt of compensation without income-tax erosion
Conclusion
The amendment proposed under Clause 108 of the Finance Bill, 2026 provides long-needed statutory clarity by expressly exempting income arising from compulsory acquisition of land under the RFCTLARR Act, 2013.
By incorporating this exemption directly into Schedule III of the Income-tax Act, 2025, the legislature has ensured consistency between land acquisition law and tax law, reinforced taxpayer certainty, and reduced avoidable litigation.
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