Compulsory Acquisition of Urban Agriculture Land



The government has the right to occupy the land of any person in the interest of society, whether that person wishes or not.

In return, compensation is given by the government to the person whose land is occupied by the government, this process is called "compulsory acquisition of land".

There can be many reasons for the government to take over the land of another person, such as - construction of highway, school, hospital or airport, public park, sports academy or for defense services etc.

Whenever someone's land is "compulsory acquire" by the government, then compensation is given to him in return, then the biggest question comes whether income tax will be levied on the compensation received in this way?

If tax is levied on such transaction, what will be its calculation and if tax is not levied then on fulfillment of which conditions will not be taxed.

compulsory acquisition of urban agriculture land

Whenever a land is compulsory acquired by the government, it is seen in two ways in the Income Tax Act 1961.
Was the compulsory acquired property agricultural land and if it was agricultural land, was the land in rural or urban area?
Was it not agricultural land?

If the property acquired by the government was not agricultural land, then income tax will be levied on it and it will be taxed under the head capital gains, which can be short term or long term capital gains .

And if it is an agricultural land and is located in a rural area, then no tax will be levied on the compensation received on compulsory acquisition of such property.

However, if the agricultural land is in an urban area, then certain conditions are fulfilled by that person, then only then the compensation received can be claimed exemption under section 10(37) of the Income Tax Act, 1961.

1 january 2014 ” RIGHT TO FAIR COMPENSATION AND TRANSPARENCY IN LAND ACQUISITION, REHABILITATION AND RESSETLEMENT ACT, 2013 ( RFCTLAAR 2013) “

Compensation received on compulsory acquisition of any property after implementation will not be taxed, provision has been made in this Act. But, so far no such provision has been added in the Income Tax Act, which would make the compensation received on compulsory acquisition of all types of properties tax free.

Keeping in mind the provisions of this Act, the CBDT also issued a circular, but no changes were made in the Income Tax Act.

See CBDT circular here – CBDT circular

If a farmer's agricultural land located in an urban area is compulsory acquired by the government, then the compensation received by the government may be exempt from tax on fulfillment of certain conditions.

These are the conditions 

Urban agricultural land should be owned by Individual or HUF only, it will not be exempted in case of Company, Firm or LLP.
In the preceding 2 years from the date on which this agricultural land has been transferred to the government, this land is being used by the individual or his parents or HUF for agricultural purposes.
Compensation received on compulsory acquisition of urban agriculture land on or after 1st April 2004.

If all these three conditions are met, then the tax exemption of compulsory acquisition of urban agriculture land can be claimed in section 10(37).

Question 1
Mr A has land in the urban area of ​​Rajasthan, which was being used by Mr A's parents for agricultural purposes since April 1, 2008, due to the highway project by the government, this land was compulsory acquired in August 2015 and in February In 2021 Mr. A got compensation of 15 lakhs. In this case what will be its tax treatment in the hands of Mr A in the financial year 2020-21?

Solution :
In this case all the three conditions mentioned above by Mr A are being fulfilled, hence the entire compensation of 15 lakhs will be exempt from tax under section 10 (37).

Note – In case of compulsory acquisition when compensation is received, the tax liability is calculated in the same year and not in the year of compulsory acquisition.

Question 2 -
If Mr A's land is not compulsory acquired by the government in the above mentioned question and Mr A sells this land to any other person, then can Mr A get tax exemption of section 10(37)?

Solution :
Tax exemption of section 10 (37) will be given in the same case, when compulsory acquisition of urban agricultural land is done by the government, hence tax exemption will not be given in case of sale of land.

Question 3
If the agricultural land mentioned in Question 1 would have belonged to ABC Limited and not of Mr A, then can it still be claimed for exemption in section 10(37).

Solution :
In section 10(37), only Individuals and HUFs are exempted from tax, so ABC Limited (Company) will not be exempted from it, even if there is compulsory acquisition of agricultural land by the government.