Interest on compensation or enhanced compensation is a unique income category under the Income Tax Act, 1961. This type of income typically arises when a court or authority awards compensation for compulsory acquisition of property or increases the amount of compensation through an enhanced order. Section 56(2)(viii) governs the taxation of such interest income to ensure it is accounted for under ‘Income from Other Sources.’

Scope of Section 56(2)(viii)

Interest on Compensation or Enhanced Compensation:

• Refers to the interest component awarded along with compensation for the compulsory acquisition of property, as per the Land Acquisition Act, 1894 or other similar laws.
• This section applies to both interest on original compensation and enhanced compensation awarded by courts or tribunals.

Taxability Under Section 56(2)(viii)

1. Head of Income:
   • Interest on compensation or enhanced compensation is taxable under the head ‘Income from Other Sources.’
2. Tax Rate:
   • The interest income is taxed at the applicable slab rate of the taxpayer.
3. Year of Taxability:
   • The entire interest is taxed in the year of receipt, irrespective of the year(s) to which the compensation relates.

Deductions Under Section 57(iv)

To provide relief to taxpayers, Section 57(iv) allows a standard deduction:

• 50% of the interest income is deductible.
• No other deductions, such as expenses or administrative costs, are allowed against this income.

Examples of Tax Treatment

1. Interest on Original Compensation:
   • Mr. A receives ₹2,00,000 as interest on compensation for the compulsory acquisition of his land. The taxable amount is:
     • Total Interest: ₹2,00,000
     • Deduction under Section 57(iv): 50% of ₹2,00,000 = ₹1,00,000
     • Taxable Interest: ₹2,00,000 – ₹1,00,000 = ₹1,00,000
2. Interest on Enhanced Compensation:
   • Ms. B is awarded ₹5,00,000 as interest on enhanced compensation by a tribunal. The taxable amount is:
     • Total Interest: ₹5,00,000
     • Deduction under Section 57(iv): 50% of ₹5,00,000 = ₹2,50,000
     • Taxable Interest: ₹5,00,000 – ₹2,50,000 = ₹2,50,000

Judicial Precedents

In CIT vs. Ghanshyam (HUF), the Supreme Court held that interest received on enhanced compensation is taxable as ‘Income from Other Sources’ and not as part of the capital receipt for compensation.

Compliance Tips for Taxpayers

1. Maintain Documentation:
   • Retain copies of court orders, tribunal awards, and other supporting documents.
2. Report Income Accurately:
   • Disclose the interest income and claim the standard deduction under Section 57(iv).
3. Seek Professional Advice:
   • Consult a tax professional for accurate computation and compliance.

Conclusion

Taxation of interest on compensation or enhanced compensation under Section 56(2)(viii) ensures that such income is brought into the tax net while providing a standard deduction to reduce the burden. Taxpayers should carefully evaluate their receipts and comply with the provisions to avoid penalties and disputes.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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