Section 194LA

Understanding Section 194LA of the Income Tax Act

Section 194LA mandates that when compensation is paid to a resident for the compulsory acquisition of immovable property (excluding agricultural land), the payer must deduct TDS at 10% before making the payment.

This deduction applies to payments made in cash, cheque, draft, or any other mode. However, if the total compensation paid to a resident does not exceed ₹2,50,000 in a financial year, no TDS is required.

The main objective of Section 194LA is to prevent tax evasion by ensuring that a portion of the compensation paid for land acquisitions is collected as tax at the source.

Applicability of Section 194LA

Section 194LA applies to any entity or individual responsible for making payments as compensation for the compulsory acquisition of immovable property, except agricultural land. It covers:

• Government authorities acquiring land for infrastructure projects.
• Private companies acquiring land for industrial development under legal provisions.
• Any other acquiring body designated by law to acquire property for public use.

If the compensation amount exceeds ₹2,50,000 in a financial year, the acquiring body must deduct TDS at the rate of 10% before making the payment.
 

Who Needs to Deduct TDS?

Any person, government authority, or company responsible for paying compensation due to land acquisition must deduct TDS before making the payment to the landowner.
 

Who Receives the Compensation?

The resident individual or entity whose land or property is compulsorily acquired under the relevant law.
 

What Qualifies as an Immovable Property Under Section 194LA?

The term immovable property includes:

• Land (except agricultural land)
• Buildings
• Parts of buildings
   

Exemptions Under Section 194LA

While Section 194LA mandates TDS on compensation for land acquisitions, certain exemptions apply:

Compensation Below ₹2,50,000

If the total compensation paid to a resident during a financial year does not exceed ₹2,50,000, no TDS is deducted.

Agricultural Land

TDS under Section 194LA does not apply to agricultural land, as defined under Section 2(14) of the Income Tax Act.
Agricultural land refers to land used for agricultural purposes and located in:
Rural areas outside municipal limits.
Areas where the population is below the prescribed limit.

Payments Exempted Under the Right to Fair Compensation and Transparency in Land Acquisition Act, 2013

Compensation paid under an award or agreement that is tax-exempt under Section 96 of this Act is not subject to TDS under Section 194LA.

Rate of TDS Under Section 194LA

The TDS rate applicable under Section 194LA is 10%. However, if the recipient fails to provide their PAN, the TDS rate increases to 20%, as per Section 206AA.

Additionally, no surcharge or health and education cess (HEC) is levied on the TDS amount under this section.

Time of Deduction of TDS Under Section 194LA

TDS must be deducted at the time of payment or when the amount is credited to the recipient's account, whichever is earlier. This ensures that tax collection happens before the payment reaches the recipient.

Modes of Payment

TDS applies irrespective of the mode of payment, whether:

• Cash
• Cheque
• Draft
• Electronic transfer
• Any other form of payment
   

Differences Between Section 194LA and Section 194IA

Both Section 194LA and Section 194IA relate to TDS on immovable property transactions, but they apply in different situations:
 

Landmark Judgements on Section 194LA

Several judicial rulings have clarified aspects of Section 194LA:

CIT v. New Okhla Industrial Development Authority (2018)

• The Supreme Court held that Section 194LA applies only to payments made by private entities or individuals.
• Government acquisitions for public welfare purposes are not subject to TDS under this section.

Principal Commissioner of Income Tax v. Bharat Hotels Limited (2019)

• Confirmed that TDS is deducted only if the compensation paid exceeds ₹2,50,000.

Commissioner of Income Tax v. Larsen & Toubro Limited (2015)

• Ruled that compensation paid for relinquishing rights over land is NOT subject to TDS under Section 194LA.

Compliance Requirements for Deductors Under Section 194LA

Entities responsible for deducting TDS under Section 194LA must:

Obtain a TAN (Tax Deduction and Collection Account Number)

• Required for deducting and depositing TDS.

Deduct TDS at the Prescribed Rate

• 10% if PAN is provided; 20% if PAN is not available.

Deposit TDS with the Government

• Must be deposited within seven days from the end of the month in which TDS was deducted.

File TDS Returns (Form 26Q)

• Quarterly filing of TDS returns is mandatory.

Issue TDS Certificate (Form 16A) to the Recipient

• This must be issued within 15 days of filing the quarterly TDS return.
   

Conclusion

Section 194LA of the Income Tax Act ensures tax compliance in cases of compulsory acquisition of immovable property. By mandating TDS deduction at 10% on compensation payments exceeding ₹2,50,000, the government aims to prevent tax evasion and streamline tax collection.

Understanding the scope, exemptions, and compliance requirements under Section 194LA is crucial for government authorities, businesses, and individuals involved in property acquisition. Ensuring timely TDS deduction and deposit helps avoid penalties and ensures adherence to tax laws.

For those dealing with land acquisition compensation, staying informed about TDS regulations can help ensure smooth transactions while meeting legal tax obligations.