Govt is going to acquire my land for airport expansion. Will I have to pay tax on capital gain?

One of our readers, Priti Mathur, has been holding a small residential plot since 2011. Now, the Government is going to acquire her plot for airport expansion, and in return, she will get money equal to the cost of the plot. She wants to know if a capital gains tax will arise in this case.

"I have been holding a small plot (residential) since 2011. Now it is going to be acquired by the government/airport authority for the extension of the airport. As per the RFCTLARR Act, any compulsory acquisition is exempt from capital gain tax. However, income tax says it is taxable. Please clarify," Mathur wrote in an email dated April 25, 2025.

The amount received from the government against any compulsory acquisition of a piece of land is not taxable. This applies even as capital gains from property are generally taxable under the Income tax Act, 1961.

As per Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (hereinafter referred to as ‘the RFCTLARR Act’), any income arising from the award or agreement made under this Act (including capital gains) is exempt from income tax, which includes capital gains tax.

As such, compensation received for compulsory acquisition of land under the RFCTLARR Act (except those made under section 46 of the RFCTLARR Act), is exempted from the levy of income tax.

This exemption is also supported by CBDT Circular No. 36/2016, dated 25 October 2016, which clarifies that compensation received for the compulsory acquisition of land under the RFCTLARR Act is not chargeable to tax under the Income Tax Act.

As such, the compensation received in respect of an award or agreement which been exempted from the levy of income tax vide section 96 of the RFCTLARR Act shall also not be taxable under the Income Tax Act even if there is no specific provision of exemption for such compensation in the Act.

Thus, although capital gains are generally taxable under the Income-tax Act, an overriding exemption applies in cases of compulsory acquisition under the RFCTLARR Act, 2013, and such compensation shall not be taxable.