194LA TDS: Updated Guide on Land Acquisition Deduction Rules

Key Takeaways
 

1. Section 194LA applies only to compulsory acquisition of non-agricultural property, where 10% TDS is deducted upfront, ensuring tax compliance before compensation reaches the landowner.
    
2. Agricultural land is fully exempt from Section 194LA, meaning no TDS is deducted, regardless of location or amount; however, landowners must still comply with capital gains tax rules.
    
3. Any TDS deducted under Section 194LA is adjustable while filing ITR, and excess tax can be claimed as a refund by correctly reporting compensation and capital gains.

Bonus Point: The Bombay High Court clarified that Section 194LA does not apply when compensation is paid to rehabilitate illegal squatters, because no land is acquired; the land already belongs to the government.

Section 194LA decides whether tax is cut before the land acquisition money reaches you. If the government acquires your property, this rule quietly works in the background to deduct TDS upfront and avoid tax surprises later.

Think of Section 194LA like a security checkpoint before compensation is paid. When non-agricultural property is acquired, the payer must deduct tax first. This ensures the government collects tax early instead of waiting until the return filing.

Ramesh’s non-agricultural land is acquired by the government, and he receives ₹6,00,000 as compensation. Since this crosses the threshold, 10% TDS of ₹60,000 is deducted. Ramesh receives ₹5,40,000, and the deducted amount is adjusted when he files his ITR.

What Is Section 194LA Under the Income Tax Act?

Section 194LA applies when land or property (except agricultural land) is taken by the government under law. If compensation is paid to a resident, the person making the payment must cut taxes before giving the money. 10% TDS is deducted at the time of payment or when it becomes due. This deducted tax is adjusted later while filing the income tax return.

194LA TDS Applicability: When Is TDS Deducted?

Let’s say Ramesh’s land (non-agricultural) is acquired by the government. He receives ₹6,00,000 as compensation. Since the amount crosses the threshold, 10% TDS (₹60,000) is deducted, and Ramesh gets ₹5,40,000 in hand.

How Section 194LA Works?
 

• Applies to compulsory acquisition of non-agricultural property
• Payment must be made to a resident
• TDS rate: 10% (20% if PAN not provided)
• Threshold limit:
  • ₹2,50,000 (till March 31, 2025)
  • ₹5,00,000 (from April 1, 2025)
• Enhanced compensation: Included
• Interest: Not included

When TDS is NOT Deducted?
 

To avoid unnecessary confusion, it’s important to know that TDS under Section 194LA is not deducted in certain specific situations listed below.
 

Section 194LA ensures tax is deducted upfront on large land acquisition payouts, keeping things clear and compliant.

194LA TDS Rate and Limit

The table below gives a quick snapshot of the rate, limit, and key rules under Section 194LA for compensation received on compulsory acquisition of property.
 

Section 194LA ensures that tax is deducted upfront on higher land acquisition compensation, while smaller payouts below the threshold remain fully exempt from TDS.

Is 194LA TDS Applicable on Agricultural Land?

If the government acquires agricultural land, no TDS is deducted on the compensation—not even ₹1. It does not matter whether the land is in a village or inside city limits.

Let’s say Sunil owns agricultural land on the edge of a city. The government acquires it and pays him ₹1 crore as compensation.
TDS deducted? No.
Because Section 194LA applies only to non-agricultural property.

Why This Happens

Section 194LA clearly says TDS applies only to ‘immovable property other than agricultural land. So agricultural land is fully outside its scope.

Key Points to Remember
 

• Agricultural land is fully exempt from TDS under Section 194LA
• Applies to both rural and urban agricultural land
• The amount of compensation does not matter

What About Tax for the Landowner?

While TDS may not apply, the actual tax treatment for the landowner depends on whether the agricultural land is classified as rural or urban under the Income Tax Act.
 

So, even though compensation for agricultural land comes without TDS, landowners should still check the land category and report the income correctly in their ITR to stay fully compliant.

No TDS upfront, but always report it correctly while filing your ITR.

194LA TDS Refund: How to Claim It?

If TDS has been deducted under Section 194LA and your actual tax liability is lower, you can easily claim the excess amount as a refund by filing your Income Tax Return (ITR).

Steps to Claim a Refund under Section 194LA

If TDS has been deducted on land acquisition compensation under Section 194LA, you can claim it back easily by filing your Income Tax Return and following these simple steps.

1. Check Form 26AS/AIS: Confirm that TDS under Section 194LA is correctly reflected and keep Form 16A for reference.
2. Calculate total income: Add all income for the year and work out your final tax liability, including capital gains.
3. File your ITR: Report the full compensation amount and claim credit for the TDS deducted.
4. Verify bank details: Ensure your bank account is pre-validated on the e-filing portal for refund credit.
5. E-verify the return: Complete e-verification using Aadhaar OTP, net banking, or digital signature and submit.

Once these steps are completed, any excess TDS deducted under Section 194LA will be refunded directly to your bank account, ensuring you get back what you are rightfully owed without compliance hassles.

Conclusion

Section 194LA simplifies tax collection on land acquisition compensation by applying TDS only to non-agricultural property above the prescribed limit. Knowing the rate, exemptions, and threshold helps landowners avoid confusion and cash flow issues. Even where TDS is not deducted, proper income reporting is crucial. Timely ITR filing allows adjustment of TDS and refund claims, ensuring full compliance without unnecessary tax stress.

FAQs

1. What is TDS on property?

TDS on property is tax deducted at source when a property is sold or compulsorily acquired, where the buyer or payer deducts tax before paying the seller or landowner.

Q2. Does location matter for agricultural land exemption?

No, agricultural land is exempt from TDS, whether it is rural or urban.

3. When is TDS on a home purchase supposed to be paid?
TDS must be deducted at the time of payment or credit to the seller, whichever is earlier, even if payments happen in parts.

4. Should TDS be paid after the first registration, the second registration, or bank disbursement?
TDS is linked to each payment made to the seller, including down payment and bank loan disbursement, not registration dates.

5. What is Section 194IA, and why was 1% TDS required on my home purchase?
Section 194IA requires the buyer to deduct 1% TDS on property purchases above ₹50,00,000 at the time of payment to the seller, and penalties apply even if the builder or bank did not inform you.