Section 10E of the Income Tax Act: Tax Exemption on Compensation Received for Surrendering Land Rights

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Introduction:

Section 10E of the Income Tax Act, 1961 is a provision that offers tax benefits to individuals who have received compensation or enhanced compensation from the government or a local authority for relinquishing their land rights. In this blog, we will discuss the details of Section 10E, including its applicability, benefits, and limitations.

Applicability of Section 10E:

Section 10E is applicable to individuals who receive compensation or enhanced compensation from the government or a local authority for relinquishing their land rights. This section does not apply to individuals who receive compensation for surrendering their rights in any other property or asset. Also, the compensation received must be for the compulsory acquisition of land by the government or a local authority.

Benefits of Section 10E:

Section 10E offers tax benefits to individuals who receive compensation or enhanced compensation for relinquishing their land rights. The benefits of this section are as follows:

Exemption of Capital Gains: The compensation or enhanced compensation received by the individual for relinquishing their land rights is exempt from capital gains tax under Section 10E.

Tax Exemption Limit: The exemption limit under Section 10E is Rs. 2,50,000. This means that if the compensation or enhanced compensation received by the individual is less than or equal to Rs. 2,50,000, it is fully exempt from tax.

Partial Exemption: If the compensation or enhanced compensation received by the individual is more than Rs. 2,50,000, the amount exceeding the exemption limit is taxable. However, the taxable amount can be reduced by investing in specified assets.

Limitations of Section 10E:

Although Section 10E offers tax benefits to individuals, it also has some limitations. These limitations are as follows:

Applicable only for Land: Section 10E is applicable only for individuals who receive compensation or enhanced compensation for relinquishing their land rights. It does not apply to compensation received for surrendering any other property or asset.

Compulsory Acquisition: The compensation or enhanced compensation received by the individual must be for the compulsory acquisition of land by the government or a local authority. If the land is sold voluntarily, Section 10E does not apply.

In addition to the benefits and limitations mentioned above, there are a few other important points to keep in mind regarding Section 10E:

  1. Time Limit for Investment: If the individual wants to reduce the taxable amount by investing in specified assets, they must do so within six months from the date of receipt of the compensation or enhanced compensation. The specified assets include bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC).
  2. Non-Applicability for Land Held as Stock-in-Trade: Section 10E does not apply to land held as stock-in-trade by the individual. In such cases, the compensation received for the sale of land is taxable as business income.
  3. Impact on Other Provisions: If an individual claims exemption under Section 10E, the cost of acquisition of the land for which the compensation was received will be considered as nil for the purpose of calculating capital gains in case the individual sells any other land in the future.
  4. Calculation of Taxable Amount: The taxable amount is calculated as the excess of compensation received over the exemption limit of Rs. 2,50,000. For example, if an individual receives compensation of Rs. 4,00,000, the taxable amount will be Rs. 1,50,000.

There are a few more important points to consider when it comes to Section 10E of the Income Tax Act:

Compensation Received in Installments: If an individual receives compensation in installments, the tax exemption under Section 10E will apply to each installment separately, subject to the exemption limit of Rs. 2,50,000.

Impact on Other Tax Deductions: The exemption under Section 10E is not considered for calculating the limit of other tax deductions, such as deduction under Section 80C or Section 80D.

Filing of Tax Return: If an individual claims exemption under Section 10E, they must disclose the details of the compensation received and the exemption claimed in their tax return.

Applicability to Legal Heirs: If an individual dies after receiving the compensation, their legal heirs will be eligible for the exemption under Section 10E if they satisfy the conditions.

Verification by Tax Authorities: The tax authorities may verify the genuineness of the compensation received and may ask for supporting documents, such as the acquisition notice, compensation order, or award.

Conclusion:

Section 10E of the Income Tax Act, 1961 provides a significant tax benefit to individuals who receive compensation or enhanced compensation for relinquishing their land rights. However, individuals should carefully review the conditions and limitations of Section 10E before claiming the exemption. They should also maintain proper documentation and consult with a tax advisor to ensure compliance with the provisions of the Income Tax Act. By following these steps, individuals can take advantage of the tax benefits offered by Section 10E while avoiding any potential tax issues.

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Frequently Asked Questions (FAQs)

  1. Who is eligible for the tax exemption under Section 10E?

Individuals who receive compensation or enhanced compensation for relinquishing their land rights are eligible for the tax exemption under Section 10E.

2. What is the exemption limit under Section 10E?
The exemption limit under Section 10E is Rs. 2,50,000.

3. What are the specified assets in which an individual can invest to claim exemption under Section 10E?
The specified assets in which an individual can invest to claim exemption under Section 10E are bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC).

4. Is the exemption under Section 10E applicable to land held as stock-in-trade?
No, the exemption under Section 10E is not applicable to land held as stock-in-trade.

5. What is the time limit for investing in specified assets to claim exemption under Section 10E?
The time limit for investing in specified assets to claim exemption under Section 10E is six months from the date of receipt of the compensation or enhanced compensation.

6. Can an individual claim exemption under Section 10E if they receive compensation in installments?
Yes, an individual can claim exemption under Section 10E if they receive compensation in installments, subject to the exemption limit of Rs. 2,50,000 for each installment.

7. How does the exemption under Section 10E impact other tax deductions?
The exemption under Section 10E is not considered for calculating the limit of other tax deductions, such as deduction under Section 80C or Section 80D.

8. Do legal heirs of an individual who received compensation qualify for the exemption under Section 10E?
Yes, the legal heirs of an individual who received compensation qualify for the exemption under Section 10E if they satisfy the conditions.

9. Does an individual need to disclose the details of the compensation received and the exemption claimed under Section 10E in their tax return?
Yes, an individual needs to disclose the details of the compensation received and the exemption claimed under Section 10E in their tax return.

10. Can the tax authorities verify the genuineness of the compensation received and ask for supporting documents?
Yes, the tax authorities can verify the genuineness of the compensation received and may ask for supporting documents, such as the acquisition notice, compensation order, or award.

 

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