Section 194LA of the Income Tax Act, 1961

Introduction 

Section194LA of the Income Tax Act,1961 is a provision that deals with the deduction of tax at source (TDS) on payment of compensation for the acquisition of particular immovable property. The section aims to ensure that taxes are collected at the source on any compensation paid for the acquisition of immovable property, which is taxable under the Income Tax Act. 

Purpose of Section 194LA 

The purpose of Section194LA is to ensure that: 

• TDS is deducted for any compensation paid to a person for the acquisition of immovable property  
• To prevent any tax evasion, and 
• To ensure that the government receives its due taxes.  

Applicability of Section 194LA  

Section194LA of the Income Tax Act, 1961 is applicable to any payment made to a resident person which is in the nature of the: 

• Compensation  
• Enhanced Compensation 
• Consideration 
• Enhanced Consideration 

For the purpose of compulsory acquisition of any immovable property but not agricultural land. 

Rate of TDS under Section 194LA 

The rate of TDS under Section194LA of the Income Tax Act is: 

1. 10% – Rate of TDS in case of PAN 
2. 20% – Rate of TDS in case of no PAN 

However, no surcharge or head and education cess (HEC) is to be deducted under Section 194LA. 

Threshold Limit under Section 194LA 

There is a threshold limit of Rs.2.5 lakhs, below which no TDS is required to be deducted. However, if the payment or aggregate amount of payment to the resident exceeds this threshold limit, TDS must be deducted. 

Time of deducting TDS under Section 194LA of the Income Tax Act, 1961 

TDS is required to be deducted at the time – 

• Such sum is credited of such sum to the account of the payee; or 
• Payment is made to the payee in cash or by way of issue of cheque/ draft/ any other mode 

whichever event takes place earlier. 

Exemption from TDS under Section 194LA 

There are certain exemptions from the TDS provisions under Section 194LA.  

Right to Fair Compensation and Transparency: If the compensation is in respect of award or agreement which is exempt from tax under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.  

Agricultural Land: TDS under Section 194LA will not be deducted if the compulsory acquisition is of agricultural land. 

Difference between Section 194LA AND Section 194IA 

Section-194LA deals with TDS on payment of compensation on acquisition of immovable property, where such payment exceeds Rs.2.5 lakhs. The person is required to deduct TDS at the rate of 10%. The deductor is usually the acquiring authority or the government in case of compulsory acquisition. 

Section 194IA deals with TDS on payment of consideration for the transfer of any immovable property, where the consideration exceeds Rs.50 lakhs. The person responsible for making the payment is required to deduct TDS at the rate of 1%. The deductor in this case is usually the buyer of the property. 

Landmark Judgements

Here are some case laws related to Section-194LA of the Income Tax Act: 

1. CIT v. New Okhla Industrial Development Authority (2018): In this case, the Supreme Court held that Section 194LA is applicable only to payments made by private individuals or companies. The court observed that the intention of the section is to ensure that the government or a statutory authority deducts tax at a source on compensation paid to landowners on the acquisition of land for public purposes. 

1. Principle Commissioner of Income Tax (Central) v. Bharat Hotels Limited (2019): In this case, it was held that Section 194LA is not applicable if the compensation paid is less than Rs.2.5 lakhs. The court observed that the provisions of the section are applicable only if the compensation paid exceeds Rs.2.5 lakhs. 

1. Commissioner of Income Tax v. Larsen and Toubro Limited (2015): In this case, it was held that the provision Section 194LA are not applicable if the compensation is paid for the relinquishing of any rights in the land and not for the acquisition of immovable property.   

Conclusion

In conclusion, Section 194LA of the Income Tax Act, 1961 ensures that the tax is collected at source on the compensation paid for the compulsory acquisition of immovable property.  

Understand more about TDS. Read our blogs here.

This article was supported and created through efforts of Ms. Rashi Khandelwal, as a part of her legal internship at Sorting Tax.