Exemption from Income Tax on Land Acquisition Compensation under NH Act Clarified

The Ministry of Road Transport and Highways (MoRTH), vide Circular dated March 30, 2026 (the “Circular”), read with the National Highways Authority of India (NHAI) Policy Circular dated April 9, 2026, has issued a clarification regarding the applicability of exemption from income tax on compensation paid for land acquired under the National Highways Act, 1956 (“NH Act”).

Under the existing legal framework, land for highway development is acquired under the NH Act, while the determination of compensation is governed by the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (“RFCTLARR Act”). Section 96 of the RFCTLARR Act provides that no income tax or stamp duty shall be levied on any award or agreement made under the said Act. However, the applicability of this exemption to acquisitions carried out under the NH Act had been under examination in light of various representations and judicial pronouncements, particularly in relation to deduction of tax at source (“TDS”) on such compensation.

The Circular clarifies that where compensation for land acquisition under the NH Act is determined in accordance with the RFCTLARR Act, such compensation shall be treated as exempt from income tax under Section 96 of the RFCTLARR Act. Consequently, no deduction of TDS shall be made on such payments.

In support of this position, the Circular refers to the clarification issued by the Central Board of Direct Taxes (CBDT) through Circular No. 36/2016, which recognised that compensation exempted under Section 96 of the RFCTLARR Act would not be taxable under the Income-tax Act, 1961, even in the absence of a specific provision therein. The Circular also takes into account judicial pronouncements, including the decision of the Hon’ble High Court of Karnataka in C.M. Uma v. Chief Commissioner of Income Tax & Ors., wherein it was held that the benefit of exemption under Section 96 extends to compensation awarded for land acquired under the NH Act, 1956, and that such compensation is not liable to income tax or TDS. The court had also observed that denying such a benefit based on the governing acquisition statute would be discriminatory and violative of Article 14 of the Constitution.

In view of the above legal position, MoRTH has directed all implementing agencies, including the NHAI, National Highways and Infrastructure Development Corporation Limited (NHIDCL), and Competent Authorities for Land Acquisition (CALAs), to ensure compliance with the clarification. Specifically, compensation determined in accordance with the RFCTLARR Act framework for acquisitions under the NH Act is to be treated as exempt from income tax, and no TDS is to be deducted on such payments.

This clarification provides much-needed certainty on the tax treatment of compensation in highway land acquisition matters and is expected to facilitate uniform implementation across projects.