Capital or revenue decides it
The governing question for any award or settlement is whether it is a capital receipt or a revenue one. A capital receipt is not taxable unless a specific section brings it to tax; a revenue receipt is taxable unless exempt. So what the money compensates for is everything. Compensation for the loss or sterilisation of a capital asset, a source of income, or a legal right, is capital, and generally not taxable. Damages for a breach of contract, or a sum for giving up your right to sue, fall on this side and are usually not taxed, and often are not even chargeable as capital gains because there is no cost of acquisition.
By contrast, compensation that stands in for income you would have earned, lost profits, lost trading receipts, is a revenue receipt and is taxable. So the same word, compensation, can be tax-free or taxable depending on what it replaces. Because this is fact-heavy and litigated, the exact character of your award is something to pin down carefully rather than assume.
Interest, non-compete, and the NRI withholding
The interest on an award is treated as its own thing. Interest awarded on enhanced compensation for property that was compulsorily acquired is taxable as income from other sources under Section 56(2)(viii) in the year you receive it, but with a generous 50% deduction under Section 57(iv), so only half of it is effectively taxed. Ordinary interest on a commercial award or decree, by contrast, does not get that 50% and is fully taxable. And a payment for agreeing not to compete or not to carry on a business is taxable as business income under Section 28, unless it is really consideration for transferring a business right, which is taxed as capital gains.
For an NRI there is a withholding wrinkle. The payer must deduct tax under Section 195 only on a sum that is chargeable to tax, which the Supreme Court has confirmed, so a genuinely capital, non-taxable award should carry no TDS. In practice, payers deduct on the whole amount to be safe, leaving you to reclaim the tax on the non-taxable part by filing a return, or to obtain a lower-deduction certificate first. A practising CA characterises the award correctly, taxes only what is taxable, applies the 50% relief to compensation-interest, and recovers tax over-deducted on a capital receipt.