When the government takes your land for a road, a metro line or a dam, the money you receive does not come to you in full. Section 194LA of the Income Tax Act requires the paying authority to cut 10% tax at source (TDS) before the compensation reaches you — if the amount crosses Rs 5 lakh in a year. Many landowners first learn about this rule when the award money lands short by a tenth. This guide explains the section 194la rate, the threshold, the agricultural land exemption, and how to get the deducted tax back.
Quick answer: Section 194LA requires 10% TDS on compensation or enhanced compensation paid to a resident for the compulsory acquisition of immovable property other than agricultural land, once the total crosses Rs 5 lakh in a financial year. The threshold rose from Rs 2.5 lakh on 1 April 2025. Agricultural land is exempt, and so are awards exempt under Section 96 of the 2013 Land Acquisition Act.
Section 194LA at a glance
| Item | Rule |
|---|---|
| Section | 194LA of the Income Tax Act, 1961 (from 1 April 2026: Section 393 of the Income Tax Act, 2025) |
| TDS rate | 10% with PAN; 20% without PAN (Section 206AA) |
| Threshold | No TDS if aggregate payments to a resident in a financial year are Rs 5,00,000 or less (Rs 2,50,000 before 1 April 2025) |
| Applies to | Compensation or enhanced compensation for compulsory acquisition of immovable property other than agricultural land |
| Paid to | Residents only (payments to non-residents fall under Section 195) |
| When deducted | At the time of payment — not when the amount is merely credited in the books |
| Deductor | Any person paying the compensation — government, authority, company or individual |
| TDS return | Form 26Q (from 1 April 2026: Form 140); TDS certificate Form 16A (now Form 131) |
| Payment code | 1012 |
| In force since | 1 October 2004 (Finance Act, 2004) |
What is Section 194LA of the Income Tax Act?
Section 194LA deals with one specific situation: the government, or an authority acting under a law, compulsorily acquires your immovable property — land, a building, or part of a building — and pays you compensation for it. The person responsible for paying that compensation must deduct 10% as TDS before handing over the money.
The word “compulsory” matters. This section does not cover an ordinary property sale where you agree on a price with a buyer. A normal sale is covered by Section 194IA instead, where the buyer deducts 1% TDS. Section 194LA applies only when the property is taken under a law — for example, under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (the 2013 Land Acquisition Act), which replaced the old Land Acquisition Act of 1894.
The section covers compensation, enhanced compensation, consideration and enhanced consideration. Enhanced compensation is the extra amount a court awards later, when the landowner challenges the original award and wins a higher figure. That extra amount is also covered, and TDS applies to it in the year it is paid.
There is no turnover test for the deductor. Any person who pays compensation for compulsory acquisition must deduct TDS — a government department, a development authority, a municipal body, or a private company acquiring land under a statutory power. The only test is the amount: the aggregate payments to one resident in a financial year must cross Rs 5 lakh.
What is the TDS rate under Section 194LA?
The TDS rate under Section 194LA is 10% of the compensation amount. It is a flat rate — it does not depend on your income slab. If you furnish your PAN, the authority deducts 10%. If you do not furnish your PAN, Section 206AA pushes the rate to 20%.
| Situation | TDS rate |
|---|---|
| PAN furnished | 10% |
| PAN not furnished | 20% (Section 206AA; from 1 April 2026, Section 397(2) of the 2025 Act) |
A 10% TDS does not mean your final tax is 10%. TDS is only tax collected in advance. Your actual tax depends on your total income and the slab you fall in. If your total tax works out lower than the TDS deducted, the extra comes back as a refund when you file your income tax return. If it works out higher, you pay the balance.
What is the threshold limit for TDS under Section 194LA?
No TDS is deducted if the aggregate compensation paid to a resident in a financial year does not exceed Rs 5,00,000. This threshold applies per person, per financial year — all payments to the same resident in the year are added together.
The threshold changed recently, and many older articles still show the old figure. Here is the correct position:
| Period | Threshold |
|---|---|
| Up to 31 March 2025 | Rs 2,50,000 |
| From 1 April 2025 | Rs 5,00,000 (Finance Act, 2025) |
The Rs 5 lakh figure is a threshold, not a tax-free slab. Once the aggregate crosses it, TDS applies to the full amount, not only to the part above Rs 5 lakh. This is the point most people get wrong.
Example: You receive Rs 3,00,000 in June and Rs 3,00,000 in December for the same acquisition. The first payment is below the threshold, so no TDS is deducted on it. But the two payments together come to Rs 6,00,000, which crosses Rs 5 lakh. At the December payment, TDS of Rs 60,000 (10% of the full Rs 6,00,000) is deducted, and you receive Rs 2,40,000 in December.
The same full-amount rule applies to a single payment. A single award of Rs 5,50,000 attracts TDS of Rs 55,000 — not 10% of the Rs 50,000 above the threshold.
Is TDS applicable on agricultural land under Section 194LA?
No. Section 194LA expressly excludes agricultural land. Compensation for the compulsory acquisition of agricultural land attracts no TDS under this section, whatever the amount.
But “agricultural land” has a specific legal meaning, and the tax treatment differs between rural and urban agricultural land:
- Rural agricultural land is not a capital asset at all under Section 2(14) of the Act. It sits outside the scope of Section 194LA entirely, and there is no capital gains tax on its transfer either.
- Urban agricultural land is a capital asset, but its compensation is exempt from income tax under Section 10(37) if three conditions are met: the land was used for agricultural purposes by the individual (or their parent) for the two years immediately before the acquisition, the transfer is by compulsory acquisition under a law, and the land is situated in an urban area. Since the compensation itself is exempt, no TDS applies.
If you hold urban agricultural land, keep proof that it was used for farming for the two years before acquisition — land records, crop details, or tenancy papers. The exemption depends on that two-year use, and the assessing officer can ask for evidence.
For a fuller treatment of agricultural land, capital gains and the Section 54B reinvestment exemption, see our guide on capital gains tax on agricultural land sale.
What about compensation exempt under Section 96 of the 2013 Land Acquisition Act?
Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 says that no income tax is payable on compensation received under an award or agreement made under that Act. The CBDT confirmed this position in Circular No. 36/2016, dated 25 October 2016: where the award or agreement is exempt from income tax under Section 96, no TDS is to be deducted under Section 194LA.
This is the most common reason no TDS appears on a land acquisition payment. Most modern acquisitions happen under the 2013 Act, so the compensation is exempt from tax altogether and no TDS is deducted. Section 194LA bites mainly where the acquisition happens under some other law, or where the payment is not covered by a Section 96 award or agreement.
If no TDS was deducted from your compensation, do not assume it was a mistake. Ask the acquiring authority whether the award was made under the 2013 Act. If it was, the payment is exempt and there is nothing to claim back — but also nothing to report as taxable income.
The courts have also kept the section within its limits. The Bombay High Court has held that Section 194LA does not apply where money is paid to rehabilitate illegal squatters, because no land is acquired at all — the land already belongs to the government.
Does Section 194LA cover enhanced compensation and interest?
Yes for enhanced compensation, no for interest. The two parts of a land acquisition payment are treated differently:
- Enhanced compensation — the extra amount awarded by a court after the original award — is covered by Section 194LA. TDS of 10% applies when it is paid. For tax purposes, enhanced compensation is taxed in the year it is received, under Section 45(5), not in the year of the original award.
- Interest on compensation — interest paid for the delay between acquisition and payment, or interest on enhanced compensation — is not covered by Section 194LA. TDS on the interest part is deducted under Section 194A (TDS on interest other than interest on securities), not under this section.
The interest also gets a special deduction. Interest on compensation or enhanced compensation is taxed as income from other sources, but Section 57(iv) allows a deduction of 50% of the interest amount. So if you receive Rs 2,00,000 as interest on enhanced compensation, only Rs 1,00,000 is added to your taxable income.
When is TDS deducted — at payment or at credit?
Section 194LA is unusual among TDS provisions: the deduction is linked to payment only. The section says the tax must be deducted “at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier”. Merely crediting the compensation in the authority’s books, without paying it, does not trigger TDS under this section. Most other TDS sections apply at the earlier of credit or payment; Section 194LA applies on a cash basis.
In practice this means the TDS appears when the money actually moves — when the cheque is issued or the amount is transferred to your account. If an award is passed but the money is stuck in a dispute or in court deposit, no TDS arises until payment is made.
Section 194LA vs Section 194IA — what is the difference?
People often mix up these two sections because both deal with immovable property. They cover opposite situations:
| Point | Section 194LA | Section 194IA |
|---|---|---|
| Situation | Compulsory acquisition of property under a law | Normal purchase of property from a seller |
| Who deducts | Any person paying the compensation | The buyer of the property |
| TDS rate | 10% (20% without PAN) | 1% |
| Threshold | Rs 5,00,000 aggregate in a financial year | Rs 50,00,000 (consideration value) |
| Agricultural land | Exempt | No exemption for agricultural land as such, but the threshold rarely applies |
| When deducted | At the time of payment | At the time of payment or credit, whichever is earlier |
| TDS return | Form 26Q (now Form 140) | Form 26QB |
If the government takes your land, it is Section 194LA at 10%. If you sell your flat to a buyer, it is Section 194IA at 1%. For the full rules on property purchase, see our guide on TDS on property purchase under Section 194IA.
Worked examples
Example 1 — Single award, PAN given. The authority acquires your plot and awards Rs 40,00,000 as compensation. You give your PAN. TDS is 10% of Rs 40,00,000, which is Rs 4,00,000. You receive Rs 36,00,000. The Rs 4,00,000 is not lost — you claim it as tax already paid in your income tax return.
Example 2 — Below the threshold. Your total compensation for the year is Rs 4,50,000. Since this is below the Rs 5,00,000 threshold, no TDS is deducted at all. You receive the full Rs 4,50,000.
Example 3 — No PAN. Your compensation is Rs 6,00,000 and you do not furnish your PAN. TDS is deducted at 20%, which is Rs 1,20,000. You receive Rs 4,80,000. Furnishing your PAN before payment would have saved Rs 60,000 of upfront deduction.
Example 4 — Enhanced compensation years later. Your land was acquired in 2023 and you received Rs 25,00,000 (TDS of Rs 2,50,000 deducted). In 2026 a court awards an additional Rs 10,00,000 as enhanced compensation. TDS of Rs 1,00,000 (10%) is deducted when the enhanced amount is paid, and the Rs 10,00,000 is taxed in the year you receive it.
Example 5 — Interest on the award. Along with the enhanced compensation, the court awards Rs 2,00,000 as interest for the delay. No TDS under Section 194LA applies to the interest — it falls under Section 194A. For income tax, you claim the 50% deduction under Section 57(iv), so only Rs 1,00,000 of the interest is taxable.
What changed in 2025 and 2026?
Two changes matter for anyone dealing with land acquisition compensation now:
From 1 April 2025 — the threshold doubled. The Finance Act, 2025 raised the Section 194LA threshold from Rs 2,50,000 to Rs 5,00,000 per financial year. Many blogs and older guides still show Rs 2,50,000. If your compensation is between Rs 2.5 lakh and Rs 5 lakh and the authority deducted TDS in the current year, check the dates — the higher threshold applies to payments made on or after 1 April 2025.
From 1 April 2026 — the section moved to the new Act. Section 194LA of the 1961 Act is now part of Section 393 (the TDS tables) of the Income Tax Act, 2025. The rate and the threshold were retained — the Income Tax Department has confirmed that the substantive TDS rates and thresholds carried over unchanged. What changed are the form numbers: the quarterly TDS return Form 26Q became Form 140, and the TDS certificate Form 16A became Form 131. The payment code for this deduction is 1012. For returns of financial year 2025-26, the old section numbers still apply; the new numbers apply to payments made on or after 1 April 2026.
What must the deductor do after deducting TDS?
If you are the authority or person paying compensation, deducting the tax is only the first step. The rest of the compliance chain is:
- Deposit the tax. Pay the deducted TDS to the government through Challan ITNS 281 by the 7th of the next month. For tax deducted in March, the due date is 30 April.
- File the quarterly return. Report the deduction in Form 26Q (now Form 140) for the quarter. The due dates are 31 July, 31 October, 31 January and 31 May for the four quarters.
- Issue the TDS certificate. Give the landowner Form 16A (now Form 131) within 15 days of the due date for filing the quarterly statement. The certificate is the landowner’s proof of the tax deducted.
- Pay interest for delays. Late deduction attracts interest at 1% per month, and late deposit at 1.5% per month, under Section 201(1A).
Our guide on Form 131, the TDS certificate due 15 November 2026 explains the certificate timelines in detail.
What should you do if TDS was deducted from your compensation?
If 10% was cut from your award, work through these steps:
- Check Form 26AS and the AIS. The TDS should appear in your Form 26AS and Annual Information Statement within a few weeks of the quarter in which it was deducted. If it is missing, ask the deductor for the Form 16A/Form 131 certificate and check whether they filed the quarterly return. Our guide on Form 26AS vs AIS vs TIS explains how to check and fix mismatches.
- Work out whether the compensation is taxable at all. If the acquisition was under the 2013 Land Acquisition Act, the compensation is exempt under Section 96 and no tax is due — if TDS was still deducted, the full amount comes back as a refund. If it was urban agricultural land used for farming for two years, Section 10(37) exempts it. Otherwise the compensation is a capital gain, and you can look at reinvestment exemptions such as Section 54 (buying another house) or Section 54B (buying agricultural land). See our guide on Section 54 capital gains exemption on a house sale.
- Report it in your return. Report the compensation under capital gains in the year it is received, and enhanced compensation in the year it is received. Claim the TDS as tax already paid. File on time — a belated return still lets you claim the refund, but it delays it.
- Claim the refund. If the TDS exceeds your actual tax, the excess is refunded after processing. There is no separate refund application; the return itself is the claim.
- Ask for a lower-deduction certificate in advance. If you know your total income is below the taxable limit, or the compensation is exempt, apply to the assessing officer for a certificate under Section 197 for deduction at a lower rate or nil rate — before the payment is made, not after.
Common mistakes to avoid
- Using the old Rs 2,50,000 threshold. The threshold has been Rs 5,00,000 since 1 April 2025. Older guides showing Rs 2.5 lakh are out of date.
- Applying TDS only to the amount above Rs 5 lakh. Once the threshold is crossed, TDS applies to the full compensation, not just the excess.
- Assuming agricultural land is always exempt. Rural agricultural land is outside the section, but urban agricultural land is exempt only if the Section 10(37) conditions — including two years of agricultural use — are met.
- Deducting TDS on the interest part under Section 194LA. Interest on compensation or enhanced compensation falls under Section 194A, not Section 194LA.
- Forgetting the 20% rate without PAN. A missing PAN doubles the deduction from 10% to 20%. Keep your PAN updated with the acquiring authority.
- Treating TDS as the final tax. TDS is an advance collection. If your slab rate is lower, or the compensation is exempt, file your return and claim the refund.
- Missing the Form 26AS check. If the deductor never filed the quarterly return, the TDS will not appear in your Form 26AS and you cannot claim credit for it. Chase the certificate.
Frequently asked questions
What is Section 194LA of the Income Tax Act?
Section 194LA requires any person paying compensation to a resident for the compulsory acquisition of immovable property (other than agricultural land) to deduct 10% TDS at the time of payment. It applies to compensation and enhanced compensation under any law, including the 2013 Land Acquisition Act. From 1 April 2026 it sits in Section 393 of the Income Tax Act, 2025.
What is the TDS rate under Section 194LA?
The rate is 10% when the recipient furnishes a PAN. If no PAN is furnished, the rate rises to 20% under Section 206AA. The rate is flat and does not depend on the recipient’s income slab. The final tax is worked out in the income tax return, and any excess TDS is refunded.
What is the threshold limit for TDS under Section 194LA?
No TDS is deducted if the aggregate compensation paid to a resident in a financial year is Rs 5,00,000 or less. The threshold was Rs 2,50,000 up to 31 March 2025 and rose to Rs 5,00,000 from 1 April 2025 under the Finance Act, 2025. Once the total crosses the threshold, TDS applies to the full amount, not just the excess.
Is TDS applicable on agricultural land under Section 194LA?
No. Section 194LA expressly excludes agricultural land, so no TDS is deducted on compensation for agricultural land, whatever the amount. Rural agricultural land is not a capital asset at all. Urban agricultural land is exempt from tax under Section 10(37) if it was used for agriculture for the two years before acquisition.
Is TDS deducted when compensation is credited but not paid?
No. Section 194LA links the deduction to payment only, unlike most TDS provisions that apply at the earlier of credit or payment. TDS is deducted when the compensation is actually paid — in cash, by cheque or draft, or by any other mode. Mere credit in the authority’s books does not trigger it.
What is the difference between Section 194LA and Section 194IA?
Section 194LA covers compulsory acquisition of property, with the payer deducting 10% above a Rs 5 lakh threshold. Section 194IA covers an ordinary property purchase, with the buyer deducting 1% when the consideration exceeds Rs 50 lakh. If the government takes your land, it is 194LA; if you sell your flat to a buyer, it is 194IA.
How do I claim credit for TDS deducted under Section 194LA?
Check that the TDS appears in your Form 26AS and AIS, then report the compensation as capital gains in your income tax return and claim the TDS as tax already paid. The TDS certificate (Form 16A, now Form 131) from the deductor is your proof. Any TDS above your actual tax liability is refunded after the return is processed.
Does Section 194LA apply to non-residents?
No. Section 194LA applies only to payments made to residents. Payments to a non-resident landowner fall under Section 195, which has no threshold and a different rate structure. If you are a non-resident, see our guide on NRI income tax in India.
Official sources
- Income Tax Department, e-filing portal — https://www.incometax.gov.in
- Income Tax Department, TDS rates and forms — https://www.incometaxindia.gov.in
- TRACES, TDS statements and certificates — https://www.tdscpc.gov.in
- Finance Act, 2025 — threshold raised from Rs 2,50,000 to Rs 5,00,000 from 1 April 2025
- CBDT Circular No. 36/2016, dated 25 October 2016 — no TDS under Section 194LA where the award or agreement is exempt under Section 96 of the 2013 Land Acquisition Act
- Income Tax Act, 2025, Section 393 — new home of Section 194LA from 1 April 2026
Closing
Section 194LA (now Section 393) is a simple rule with a sharp edge: 10% TDS on land acquisition compensation above Rs 5 lakh a year, 20% without a PAN, and no TDS at all on agricultural land or on awards exempt under Section 96 of the 2013 Act. The two things to remember are the full-amount rule — once the threshold is crossed, the tax applies to the whole compensation — and that TDS is not your final tax. Check Form 26AS, report the compensation in the right year, and claim back whatever is more than you owe.
Reviewed by Asuthod Rathod, CA. Last updated: 11 November 2026.
Disclaimer: This article is for general information only and is not tax advice. Tax rules change with every Budget — check the latest provisions on the Income Tax Department portal or consult a chartered accountant before acting.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.