Budget 2026-27 Proposes Tax Relief On Compensation Received For Compulsory Land Acquisition

In the Union Budget 2026, the Finance Minister has proposed to exempt income in respect of any award or agreement arising from the compulsory acquisition of land under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) from income tax, with effect from Assessment Year 2026–27.

Under the existing framework, Schedule III of the Income-tax Act provides certain exemptions in respect of capital gains, but does not expressly cover all forms of compensation received on the compulsory acquisition of land.

Section 96 of the RFCTLARR Act provides that no income tax shall be levied on any award or agreement made under the Act, except those made under Section 46.

The Central Board of Direct Taxes (CBDT) had issued Circular No. 36/2016 stating that compensation exempt under Section 96 of the RFCTLARR Act would not be taxable under the Income-tax Act, even in the absence of a specific exemption provision.

Despite the circular, disputes have continued due to the absence of an explicit statutory exemption within the Income-tax Act.

The Budget 2026 proposal provides for an amendment to Schedule III of the Income-tax Act to exempt income in respect of any award or agreement made on account of the compulsory acquisition of land under the RFCTLARR Act.

The amendment is proposed to take effect from 1 April 2026 and will apply from Assessment Year 2026–27.