When the government acquires your Indian land, and whether the compensation is taxed

The widest relief comes from the land-acquisition law itself. Section 96 of the RFCTLARR Act 2013, the Right to Fair Compensation and Transparency in Land Acquisition Act, provides that no income tax is levied on an award or agreement made under that Act (Section 96). Crucially, this exemption is not limited to agricultural land: any land acquired under the Act, residential, commercial or industrial, gets it, a point the CBDT confirmed in a circular so that assessing officers could not tax non-agricultural acquisition compensation.

So the first question on your acquisition is which law the land was taken under. If it was acquired under the RFCTLARR Act, the compensation is exempt regardless of the type of land. The one caution is that acquisitions under some other special statutes may not automatically carry this exemption, so the acquiring law has to be checked, which is where a CA starts.

Even outside the RFCTLARR route, agricultural land has its own protection. Rural agricultural land is not a capital asset in the first place (Section 2(14)), so its acquisition produces no capital gain to tax. Urban agricultural land is a capital asset, but the capital gain on its compulsory acquisition is exempt under Section 10(37) if the conditions are met: the land was used for agriculture for the two years immediately before, and the compensation was received on or after 1 April 2004.

So an NRI whose farmland is acquired is often not taxed on the gain, either because the land was rural and outside the capital-asset net, or because the Section 10(37) conditions are satisfied. Between the RFCTLARR exemption and the agricultural exemptions, most genuine acquisition compensation on land held and used properly is exempt, and a practising CA maps which exemption applies to your specific acquisition.

On withholding, the rule NRIs must know is that the resident acquisition-TDS provision, Section 194LA, does not apply to a non-resident at all, it is written only for payments to residents. So a deductor cannot use 194LA on your compensation. Where the compensation is exempt, under RFCTLARR or Section 10(37), no TDS is due at all, because there is no taxable income. Where some component is genuinely taxable, the deductor uses Section 195, and you reduce or recover it in the usual way.

The trap is the interest. Compulsory acquisitions are often paid late, or the compensation is enhanced on appeal, and the interest on delayed or enhanced compensation is usually taxable even when the compensation itself is exempt. So a payout can be part-exempt, the principal compensation, and part-taxable, the interest, and it is easy to treat the whole thing as tax-free by mistake. A practising CA separates the exempt compensation from the taxable interest, applies the right exemption, and handles any Section 195 withholding so the position is correct.