Section 194LA of the Income Tax Act: TDS on Compensation for Compulsory Acquisition of Immovable Property

Section 194LA of the Income Tax Act, 1961, is a key provision dealing with the deduction of Tax Deducted at Source (TDS) on compensation paid for the compulsory acquisition of immovable property. This section ensures that tax is collected at the source when land or property is acquired by the government or an authorized body for public purposes.

Applicability of Section 194LA

Section 194LA applies when:

• Payer (Deductor): Any person (e.g., government authorities acquiring land for infrastructure projects, private companies acquiring land under legal provisions, or any other acquiring body designated by law) who is responsible for paying compensation.
• Payee (Recipient): A resident individual or entity whose immovable property is compulsorily acquired under any law in force.
• Nature of Payment: The payment must be in the nature of compensation, enhanced compensation, consideration, or enhanced consideration for the compulsory acquisition of immovable property.
• Property Type: This section applies to immovable property which includes land (other than agricultural land), buildings, or parts of buildings.

Important Distinction: This section specifically excludes agricultural land from its purview. Compensation received for agricultural land (as defined under Section 2(14) of the Income Tax Act) is not subject to TDS under Section 194LA.

TDS Rate under Section 194LA

The standard rate of TDS under Section 194LA is **10%** of the compensation amount.

• Higher Rate for Non-PAN: If the payee fails to provide a valid Permanent Account Number (PAN), TDS will be deducted at a higher rate of **20%**, as per Section 206AA of the Income Tax Act.
• No Surcharge or Health & Education Cess is applicable on this TDS rate.

Threshold Limit for TDS Deduction

TDS under Section 194LA is required to be deducted if the aggregate amount of compensation paid to a resident during a financial year exceeds a certain limit:

• Up to March 31, 2025: The threshold limit is ₹2,50,000.
• From April 1, 2025, onwards: The threshold limit has been increased to ₹5,00,000.

No TDS deduction is required if the compensation amount does not exceed the applicable threshold limit in a financial year.

Time of Tax Deduction

The deductor must deduct TDS under Section 194LA at the time of payment of such compensation, whether in cash, by cheque, draft, or any other mode.

Exemptions from TDS under Section 194LA

TDS under Section 194LA is not applicable in the following scenarios:

• Compensation Below Threshold: If the total compensation paid to a resident during a financial year does not exceed the prescribed threshold limit (₹2,50,000 or ₹5,00,000, as applicable).
• Agricultural Land: Payments made for the compulsory acquisition of agricultural land, as defined in Section 2(14) of the Income Tax Act.
• Exempt Awards/Agreements: Compensation paid in respect of any award or agreement that has been exempted from the levy of income-tax under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.

Note on Enhanced Compensation and Interest: While enhanced compensation for property acquisition is covered, any interest component included in enhanced compensation (e.g., for delays in payment) is generally subject to TDS under Section 194A (TDS on interest other than interest on securities), not Section 194LA.

Responsibilities of the Deductor

The person responsible for deducting TDS under Section 194LA has standard compliance obligations:

• Obtain TAN: The deductor is required to have a Tax Deduction and Collection Account Number (TAN).
• Obtain Payee's PAN: Must obtain the PAN of the landowner to avoid higher TDS deduction.
• Deduction of Tax: Deduct TDS at the correct rate (10% or 20%).
• Deposit of Tax: Deposit the deducted TDS to the credit of the Central Government within the prescribed due dates.
• Filing of TDS Returns: File quarterly TDS returns in Form 26Q within the specified due dates.
• Issuance of TDS Certificates: Provide a TDS certificate in Form 16A to the payee as proof of TDS deduction and deposit.

Penalties for Non-Compliance: Failure to comply with the provisions of Section 194LA can attract significant penalties and interest, similar to other TDS defaults. These include:

• Interest under Section 201(1A) for delay in deduction (1% per month) or delay in deposit (1.5% per month).
• Penalty under Section 271C for failure to deduct or pay TDS.
• Late filing fees for TDS returns (₹200 per day).

Taxability for the Landowner (Payee)

The compensation received by the landowner, even after TDS deduction, remains taxable income. This income is generally treated as Capital Gains. The landowner must report the full compensation when filing their Income Tax Return (ITR).

The TDS deducted under Section 194LA can be claimed as a credit against the payee's final tax liability. The payee can verify the TDS credit in their Form 26AS and reconcile it with the Form 16A provided by the deductor. This credit helps offset the final tax payable or may lead to a tax refund.

Conclusion

Section 194LA is a vital provision designed to ensure the collection of tax on compensation paid for the compulsory acquisition of immovable property. Both the acquiring authorities/persons and the property owners must have a clear understanding of its provisions to ensure accurate TDS deduction, timely deposit, and proper reporting. Adhering to these compliance requirements is essential for maintaining full compliance with income tax laws.