I received years of interest on a compensation award in one go. Is it all taxed this year?
Yes. Section 145B(1) deems interest on compensation or enhanced compensation to be income of the previous year in which it is received, whatever your method of accounting; section 56(2)(viii) charges it under income from other sources; and section 57(iv) gives a flat deduction of 50% with no other deduction permitted. That receipt-basis scheme replaced the accrual position under the Supreme Court's decision in Rama Bai.
Compensation cases take years, and the interest awarded on delayed compensation therefore arrives as a lump sum covering a long stretch of time. Before 2010 the Supreme Court in Rama Bai held that such interest accrued from year to year and had to be spread over the years of delay — which meant reopening old assessments, and hardship for claimants who had never seen the money.
The Finance Act 2009 replaced that with a receipt-based scheme with effect from 1 April 2010, that is assessment year 2010-11. Section 56(2)(viii) brings income by way of interest received on compensation or on enhanced compensation under the head income from other sources. The timing rule was originally in section 145A(b) and now sits in section 145B(1), which says the interest shall be deemed to be the income of the previous year in which it is received.
The deeming overrides your accounting method. A person on mercantile basis does not accrue it year by year; the whole lump comes into charge in the year of receipt.
Section 57(iv) balances that with a blunt allowance: a deduction of fifty per cent of such income, and no deduction is allowed under any other clause of section 57 in respect of it. It is a flat statutory figure, not a reimbursement — you get 50% whether your actual costs of pursuing the claim were more or less. So Rs 6,00,000 of interest received produces Rs 3,00,000 of taxable income and nothing further can be claimed against it.
Section 145B also carries two neighbouring timing rules that are often confused with the interest one. Sub-section (2) deems a claim for escalation of price in a contract or an export incentive to be income of the year in which reasonable certainty of its realisation is achieved. Sub-section (3) deems assistance in the nature of subsidy, grant, cash incentive and the like, referred to in section 2(24)(xviii), to be income of the year of receipt if not charged in an earlier year.
The interest rule interacts awkwardly with the capital gains rules for compulsory acquisition. The Supreme Court in Ghanshyam (HUF) held that interest under section 28 of the Land Acquisition Act 1894 is an accretion to the value of the land and part of enhanced compensation, taxable as capital gain under section 45(5) — which would take it outside sections 56(2)(viii) and 57(iv) and, in an exempt acquisition, outside tax altogether. The Punjab and Haryana High Court in Mahender Pal Narang held that the 2009 amendments changed that entirely and all such interest is now other-sources income. Gujarat took the Ghanshyam view in Movaliya Bhikhubhai.
On withholding, section 194A(3)(ix) relieves the payer from deducting tax on interest on compensation awarded by a Motor Accidents Claims Tribunal where the amount credited or paid in the financial year does not exceed fifty thousand rupees.
Receiving eight years of interest in one year can push a modest claimant into the top slab, and there is no averaging or spreading available — the deeming in section 145B(1) is absolute. The 50% deduction is the only relief, and taxpayers frequently either miss it or try to add legal fees on top, which section 57(iv) forbids.
The Tribunal split my client's land acquisition interest into 9 per cent as capital gains and 15 per cent as income from other sources. Is that right?
For a year after 2010, is the interest I received under s.28 of the Land Acquisition Act still capital gains following Ghanshyam, or has s.56(2)(viii) changed that?
My client received interest on enhanced compensation for compulsorily acquired land. Ghanshyam says it is part of compensation. Does that still hold?
My bank has deducted tax on my fixed deposit interest and I was told the limit had gone up. My father is a senior citizen and his bank deducted too. There is also a loan I took from a friend on which I pay interest, and a co-operative society that pays me interest on a deposit. Who exactly has to deduct under section 194A, on what amount, and what are the limits as they stand now?
The land acquisition officer has deducted ten per cent from my compensation cheque. When is s.194LA actually attracted, what is the threshold now, and does the RFCTLARR exemption stop the deduction?
The Delhi High Court struck down parts of the ICDS in 2017. Can I still rely on that for an AY 2017-18 assessment?
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