Budget 2026 land acquisition tax break: Experts decode gains and limits

Tax exemption on acquired land compensation gets legal clarity from April 2026; urban and non-farm plots also covered.

Landowners whose property is acquired by the government for development activities, including expansion of infrastructure, industrialisation and urbanisation under the RFCTLARR Act, will not have to pay income tax on the compensation received, under a key Budget 2026 proposal.

 

The move gives statutory clarity and widens the scope of tax relief, especially for urban and non-agricultural land parcels.

 

Tax experts say the change removes long-standing ambiguity and reduces the risk of disputes at the assessment stage.

 

Wider and clearer exemption

 

Kunal Savani, partner at Cyril Amarchand Mangaldas, says the proposal “brings a wider relief as compared to previous exemption on capital gains that applied only to certain agricultural land.” He adds that it will particularly benefit taxpayers owning non-agricultural or urban land acquired for industrial corridors, highways, metro lines and railway projects.

 

He notes that by writing the exemption directly into the income-tax law, the government has effectively codified positions already upheld by courts, which should reduce future litigation around compulsory acquisition compensation.

 

Rajiv Sharma, partner at Singhania & Co, says the Finance Bill amendment uses the term “any land”, which settles the earlier confusion over whether only agricultural land qualified. According to him, this means residential, commercial and other land types acquired compulsorily will also get exemption on compensation, helping speed up infrastructure projects in and around cities.

 

What changes for taxpayers?

 

Sudhir Kaushik, co-founder and chief executive officer at Taxspanner, says earlier the exemption largely flowed from Section 96 of the RFCTLARR Act and a CBDT circular, but there was no explicit exempt-income entry in the income-tax law. “From acquisitions on or after April 1, 2026, the exemption is clearly codified for individuals and HUFs,” he says.

 

Kaushik illustrates with examples- compensation of Rs 50 lakh or even Rs 1 crore received after April 1, 2026 under an RFCTLARR award would be fully exempt, provided it is not covered under Section 46.

 

Key exception and compliance steps

 

Experts caution that Section 46 cases, where land is acquired through private or company-led arrangements rather than classic government compulsory acquisition, remain taxable. Savani says acquisitions through company-led or hybrid structures will not get the exemption.

 

Even where income is exempt, Kaushik advises taxpayers to disclose it in their return under exempt income, keep award documents and compensation break-ups, and check that no tax has been wrongly deducted at source, claiming a refund if needed.