Govt Acquired Your Agricultural Land? Is that 100% Tax-Free?
- Section 10(37) (Income-tax Act, 1961) fully exempts capital gains of an individual or HUF when urban agricultural land is compulsorily acquired.
- In the Income-tax Act, 2025 (from 1 April 2026), the same exemption sits in Section 11 read with Schedule III.
- From tax year 2026-27, Schedule III also exempts income from an award or agreement under the RFCTLARR Act, 2013 (except Section 46 deals) for individuals and HUFs, for agricultural and non-agricultural land.
- Rural agricultural land is not a capital asset at all, so there is no capital gains tax on it.
👀 Eye-opener: "Government land = tax-free" is only half true
- The exemption depends on who owns the land, how it was used and which law was used to acquire it.
- Miss one condition and a ₹1.25 crore award can attract about ₹15.7 lakh of tax (example below).
- Hidden risk: land left fallow, or used for a non-farm purpose, in the 2 years before acquisition can lose the 10(37) exemption.
- Interest on delayed compensation is a separate item. It may be taxable even when the compensation is not.
📜Section 10(37) conditions: who gets the exemption?
| Condition | What it means |
|---|---|
| Who | Only an individual or HUF. Not companies, firms or LLPs |
| Which land | Urban agricultural land, which is a capital asset under Section 2(14) |
| Use | Used for agriculture for 2 years just before transfer, by the individual or a parent, or by the HUF |
| Mode | Compulsory acquisition under any law, or a price fixed or approved by the Central Government or RBI |
| When | Compensation received on or after 1 April 2004. Enhanced compensation is also covered |
Urban vs rural test (Section 2(14)): land is "urban" if it is within a municipality or cantonment with population of 10,000 or more, or within 2 km, 6 km or 8 km of such limits, depending on the population (above 10,000, above 1 lakh, above 10 lakh). Everything else is rural.
🔁Section 10(37) in the new Income Tax Act 2025: corresponding section
| Topic | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Exemption on compulsory acquisition of agricultural land | Section 10(37) | Section 11 read with Schedule III |
| Compensation under RFCTLARR Act (award/agreement) | CBDT Circular 36/2016 (based on Section 96 of RFCTLARR) | Express entry in Schedule III, added by Finance Act 2026, from 1 April 2026 |
| Reinvest in agricultural land | Section 54B | Section 83 |
| Capital gains bonds | Section 54EC | Section 85 |
| TDS on compensation | Section 194LA | Section 393 (TDS table) |
Acquisitions before 1 April 2026 continue to follow Section 10(37) and Circular 36/2016.
🧮Worked example: ₹0 tax vs about ₹15.7 lakh
Ravi (resident individual) bought farmland near a city in 2012 for ₹20 lakh. In 2026-27 it is compulsorily acquired for ₹1.25 crore.
| Scenario | Capital gain | Tax |
|---|---|---|
| A. He farmed it for the last 2 years: Schedule III / 10(37) applies | ₹1,05,00,000 | ₹0 |
| B. Land lay fallow, no RFCTLARR award: LTCG @12.5% + 15% surcharge + 4% cess | ₹1,05,00,000 | ₹15,69,750 |
| C. Same as B, but ₹50 lakh put in 54EC bonds within 6 months (LTCG @12.5% + 10% surcharge + 4% cess) | ₹55,00,000 | ₹7,86,500 |
Scenario B is ₹13,12,500 × 1.15 × 1.04. In scenario C, 54EC alone saves about ₹7.83 lakh. Section 54F (a new house) may cover the rest, subject to its conditions. Section 54B needs the same 2-year farming use, so it will not help here. Figures assume no other income. Resident individuals with land bought before 23 July 2024 should also compare the 20%-with-indexation option.
- Private purchase is not compulsory acquisition. A sale to a private builder or company does not qualify. RFCTLARR Section 46 purchases are excluded from the new exemption.
- Interest on delayed compensation is generally taxed as "other income" with a 50% deduction. Get it checked case by case.
- TDS: where the award is exempt, TDS should not apply. If TDS was deducted, claim the refund in your ITR.
- Report it. Show exempt compensation in the exempt-income schedule of your ITR. Do not leave it out.
✅Steps to claim the land acquisition tax exemption
❓FAQs on compulsory acquisition and income tax
What is the section corresponding to 10(37) in the new Income Tax Act 2025?
Section 11 read with Schedule III of the Income-tax Act, 2025, applicable from tax year 2026-27.
Is compensation for compulsory acquisition of non-agricultural land taxable?
If the award or agreement is under the RFCTLARR Act (other than Section 46), it is exempt for individuals and HUFs. For earlier years, Circular 36/2016 applies. Acquisitions under other laws are generally taxable as capital gains.
Is enhanced compensation exempt under Section 10(37)?
Yes, enhanced compensation for qualifying agricultural land is also exempt. Interest on it is a separate question.
Does Section 10(37) apply under the new tax regime?
Yes. It is an exemption of income, available under both regimes.
🤝 Land acquired, or a notice received?
Talk to a Chartered Accountant before you file, to check the exemption and your reinvestment options.
Disclaimer: This post is for general education as of November 2026 and is not professional advice. Check the facts of your case before you act.
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