Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

The deduction of tax at source (TDS) is a foundational mechanism in Indian taxation, ensuring advance collection of tax and broadening the tax base. The Income Tax Bill, 2025, proposes to consolidate and rationalize TDS provisions, including those relating to compensation on compulsory acquisition of immovable property. This commentary focuses on Clause 393(1)[Table: S.No. 3(iii)] and Clause 393(4)[Table: S.No. 3] of the Income Tax Bill, 2025, analyzing their operation, objectives, and implications, and compares them with the existing Section 194LA of the Income Tax Act, 1961. The analysis covers legislative intent, detailed breakdown of the provisions, practical implications, and a comparative study, highlighting continuities and changes, as well as potential issues for stakeholders.

Objective and Purpose

The legislative intent behind TDS on compensation for compulsory acquisition of immovable property is to ensure that such receipts, which may be substantial and sporadic, do not escape the tax net. Section 194LA was introduced to capture tax at the point of payment of compensation, recognizing that recipients may otherwise have no regular tax liability or may not report such income. The Income Tax Bill, 2025, continues this policy, aiming for greater clarity, consolidation, and alignment with contemporary land acquisition laws, especially post the enactment of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 ("RFCTLARR Act").

Detailed Analysis

I. Clause 393(1)[Table: S.No. 3(iii)] of the Income Tax Bill, 2025,

Textual Provision:
This clause mandates TDS on:

• Any sum, being in the nature of:
  • (a) compensation or the enhanced compensation; or
  • (b) consideration or the enhanced consideration,
  on account of compulsory acquisition, under any law for the time being in force, of any immovable property (other than agricultural land).
• Payer: Any person.
• Rate: 10%.
• Threshold limit: Rs. 5,00,000.

The deduction is triggered when the amount paid or credited to a resident exceeds Rs. 5,00,000 in a financial year. The provision applies to both compensation and any subsequent enhancement thereof, ensuring coverage of all forms of consideration received due to compulsory acquisition.

II. Clause 393(4)[Table: S.No. 3] of the Income Tax Bill, 2025,

Textual Provision:
Clause 393(4) provides for exceptions to TDS. Table S.No. 3 specifically exempts:

• Income by way of any award or agreement which has been exempted from levy of income-tax u/s 96 of the RFCTLARR Act, 2013.

This means, where the compensation awarded for compulsory acquisition is exempt u/s 96 of the RFCTLARR Act, no TDS is to be made, even if the amount exceeds the threshold.

III. Section 194LA of the Income Tax Act, 1961

Textual Provision:
Section 194LA requires:

• Any person responsible for paying to a resident any sum, being in the nature of compensation or enhanced compensation or consideration or enhanced consideration on account of compulsory acquisition, under any law for the time being in force, of any immovable property (other than agricultural land), to deduct an amount equal to 10% of such sum as income-tax at the time of payment (in cash, cheque, draft, or any other mode), whichever is earlier.
• No deduction if the amount or aggregate amount paid during the financial year does not exceed Rs. 5,00,000 (as per Finance Act, 2025; earlier, it was lower).
• No deduction if the payment is in respect of any award or agreement exempt u/s 96 of the RFCTLARR Act.
• Definitions of "agricultural land" and "immovable property" are provided.

Interpretation and Key Features of Each Provision

A. Scope of TDS Obligation

Both Clause 393(1)[Table: S.No. 3(iii)] and Section 194LA impose TDS on compensation (including enhanced compensation or consideration) paid to residents for compulsory acquisition of immovable property, excluding agricultural land. The scope covers all forms of payment, whether initial or subsequent, arising from the acquisition process.

B. Rate and Threshold

• Rate: Both the Bill and Section 194LA prescribe a 10% TDS rate.
• Threshold: The threshold for TDS is Rs. 5,00,000 in both the Bill (as per Table D) and Section 194LA (post Finance Act, 2025 amendment).

This parity ensures continuity and avoids confusion or abrupt changes for taxpayers and deductors.

C. Timing and Mode of Deduction

Both provisions require deduction at the time of payment or credit, whichever is earlier, regardless of the mode (cash, cheque, draft, or other modes). This is in line with standard TDS practice, ensuring tax is collected at the earliest opportunity.

D. Exclusion of Agricultural Land

Both provisions exclude agricultural land from the definition of "immovable property" for TDS purposes. Section 194LA provides a detailed definition, referencing section 2(14)(iii) of the Income Tax Act, 1961, which includes land in rural areas as well as certain notified areas. The Bill, while not repeating the definition verbatim, is presumed to adopt a similar approach, given the legislative continuity and the intent to avoid taxing agricultural income, which is constitutionally exempt.

E. Exemption for Awards u/s 96, RFCTLARR Act

A significant feature of both the Bill and existing law is the exemption for compensation paid under awards or agreements exempted from income-tax u/s 96 of the RFCTLARR Act, 2013. Section 96 states that no income-tax or stamp duty shall be levied on any compensation awarded under the Act, reflecting legislative intent to protect landowners from tax on such compensation. Clause 393(4)[Table: S.No. 3] of the Bill and the second proviso to Section 194LA both operationalize this exemption by prohibiting TDS in such cases.

F. Definitions and Ambit

Section 194LA provides explicit definitions for "agricultural land" and "immovable property," ensuring clarity in application. The Bill, while not repeating these definitions in Clause 393, is likely to rely on the general definitions provided elsewhere in the Bill or by reference to existing law. This approach is consistent with legislative drafting practices, especially in a consolidating statute.

Practical Implications

1. For Deductors (Acquiring Authorities)

• Obligation to deduct TDS at 10% if the compensation paid to a resident (other than for agricultural land) exceeds Rs. 5,00,000 in a financial year.
• Need to correctly identify whether the land is agricultural as per statutory definitions. Misclassification can lead to non-compliance or wrongful deduction.
• Responsibility to check whether the award or agreement is exempt u/s 96 of the RFCTLARR Act. If so, no TDS is required, even if the amount is substantial.
• Procedural compliance: Timely deposit of TDS, issuance of TDS certificates, and reporting obligations continue to apply.

2. For Recipients (Landowners)

• Receipts are subject to TDS unless the land is agricultural or the acquisition is exempt u/s 96 of the RFCTLARR Act.
• Where TDS is deducted, the recipient can claim credit while filing the return and, if eligible, seek refund if the actual tax liability is lower.
• Potential for cash flow impact if TDS is deducted but the compensation is ultimately exempt (e.g., due to subsequent clarification about the nature of the land or the exemption u/s 96).

3. For Tax Administration

• Continued need for clear communication and guidance to acquiring authorities, especially regarding the scope of section 96 exemptions.
• Potential for litigation or disputes where classification of land or the applicability of section 96 is unclear.
• Ensuring that the consolidation and rationalization of TDS provisions in the Bill does not create interpretive confusion or compliance gaps.

Comparative Analysis with Section 194LA of the Income Tax Act, 1961

A. Structural and Drafting Differences

The Income Tax Bill, 2025, seeks to consolidate TDS provisions in a tabular and modular format, grouping similar payments and their respective TDS requirements for ease of reference. Section 194LA, in contrast, is a stand-alone provision. The Bill's approach enhances clarity and accessibility, especially for non-experts and institutional deductors.

B. Threshold and Rate Alignment

The Bill maintains the threshold and rate as per the latest amendment to Section 194LA, ensuring a seamless transition and minimizing disruptive impact. This signals legislative intent to maintain status quo on substantive taxation, focusing instead on procedural modernization.

C. Exemption for Awards u/s 96, RFCTLARR Act

Both the Bill and Section 194LA provide for exemption from TDS where the compensation is exempt u/s 96 of the RFCTLARR Act. The Bill, by specifically cross-referencing the relevant clause, ensures that the exemption is clear and operationally effective.

D. Definitions and Potential Ambiguities

Section 194LA expressly defines "agricultural land" and "immovable property," reducing interpretive uncertainty. The Bill, while not repeating these definitions in the TDS clause, likely relies on centralized definitions, which could, in practice, lead to disputes if not carefully harmonized. For instance, if the definition of "agricultural land" is narrower or broader in the Bill than in Section 2(14)(iii) of the 1961 Act, it could alter the scope of TDS, impacting both revenue and taxpayer rights.

E. Procedural Provisions

The Bill, by grouping TDS provisions, also clarifies procedural aspects such as timing (credit or payment, whichever is earlier), and incorporates general exceptions and declarations for non-deduction (e.g., where the recipient's total income is below the taxable limit). These procedural clarifications are in line with modern drafting and administrative convenience.

F. Policy Continuity and Legislative Intent

The Bill's provisions reflect a clear intent to continue the established policy of taxing compensation for compulsory acquisition, except where agricultural land or section 96 exemption applies. The modernization of language and structure does not alter the substantive tax burden or relief available to taxpayers.

Ambiguities and Potential Issues

1. Definition of Agricultural Land

The absence of an explicit definition in Clause 393(1)[Table: S.No. 3(iii)] could create interpretive challenges, especially if the Bill's general definitions differ from those in the 1961 Act. Judicial precedents under the 1961 Act (e.g., regarding the proximity to municipal limits, use of land, etc.) may need to be considered, and administrative guidance may be necessary.

2. Determination of Section 96 Exemption

While the Bill and Section 194LA both exempt awards covered by section 96 of the RFCTLARR Act, determining whether a particular award or agreement qualifies can be complex, especially in cases of partial acquisition, negotiated settlements, or acquisitions under other statutes. The risk of wrongful deduction or non-deduction remains unless acquiring authorities are well-trained or provided with clear instructions.

3. Enhanced Compensation and Subsequent Payments

Both the Bill and Section 194LA cover enhanced compensation, but practical issues may arise regarding TDS on interest awarded by courts, or on delayed payments. Judicial decisions under the 1961 Act have clarified that TDS applies to the principal amount, but not always to interest, depending on the characterization of the payment. The Bill does not explicitly address this, so reliance on case law may continue.

4. Multiple Deductors and Aggregation

Where compensation is paid by multiple authorities or in installments, aggregation for threshold purposes can be complex. The Bill provides that the threshold applies to the aggregate of amounts paid or payable, but operationalizing this may be challenging, especially where payments are staggered or made by different agencies.

Stakeholder Impact

1. Government and Acquiring Bodies

The Bill aligns with existing practice, so compliance systems already in place u/s 194LA will largely continue. However, the need for training on the new format and possible changes in definitions may require transitional support.

2. Landowners and Recipients

Landowners, especially small and marginal farmers, continue to benefit from the exemption for agricultural land and for awards covered by section 96 of the RFCTLARR Act. The increase in threshold to Rs. 5,00,000 (as per the latest amendment) provides additional relief to those receiving smaller amounts of compensation.

3. Tax Professionals and Administrators

The consolidation and tabular presentation in the Bill may simplify advisory and compliance work, but only if definitions and cross-references are clearly harmonized. There may be an initial period of adjustment as practitioners and administrators familiarize themselves with the new structure.

Comparative Table 

Conclusion

Clause 393(1)[Table: S.No. 3(iii)] and Clause 393(4)[Table: S.No. 3] of the Income Tax Bill, 2025,, represent a modernized, consolidated framework for TDS on compensation for compulsory acquisition of immovable property, closely mirroring the substantive law under Section 194LA of the Income Tax Act, 1961. The Bill preserves key policy features: a 10% TDS rate, a Rs. 5,00,000 threshold, exclusion of agricultural land, and exemption for awards covered by section 96 of the RFCTLARR Act. The main changes are structural and procedural, aiming for clarity and ease of compliance. Stakeholders must, however, be alert to the need for clear definitions and guidance, especially regarding agricultural land and the scope of section 96 exemptions. The transition to the new regime should be smooth, provided adequate administrative support and communication are ensured.

Full Text:

Clause 393 Tax to be deducted at source.