Farmers will not have to cough up any tax upfront on the compensation money they receive for their land acquired by the government. The rural development ministry has clarified after complaints that in absence of clear rules the harshest provisions were being imposed.

"We have issued orders that all compensation money for agricultural land acquisitions in both urban and rural areas should be made without any deductions," said an official in the department of land resources, ministry of rural development.

Compensation awarded under the Land Acquisition Act for both urban and rural agricultural land is exempt from income tax.

But for the last three years district collectors were deducting tax at source, or TDS, at the rate of 10.33% before transferring the compensation amount into the accounts of beneficiaries. "TDS was being deducted due to absence of any clear direction," the official added.

The district administration did not want to take any chance as recovering any tax after the entire payment had been made would have been almost impossible.

The TDS has caused a lot of hardship to farmers who have to then file income tax return to claim the tax deducted by authorities even when their agricultural income is exempt from tax.

In most cases, due to lack of awareness that the deducted amount could be claimed back, farmers actually lost over 10% of their compensation.

The grievance came to light after the authorities reached out to farmers to settle the violent protests against land acquisition and inadequate compensation packages broke out in Uttar Pradesh, Haryana, Orissa and other states. After receiving complaints from various states, the ministry of rural development took up the issue with the finance ministry.

The finance ministry has also issued a directive to its field officials clarifying that no tax is to be deducted on compensation paid in lieu of acquisition of rural and urban agricultural land and they should not insist on authorities to deduct tax. "A circular has been issued clarifying the matter," a ministry official said.

TDS contributes more than 35% to total direct taxes collections. There has been growing on emphasis on TDS as it is a neat and efficient way of collecting taxes, which also helps in establishing an audit trail.

Tax has to be deducted whenever a payment is made above Rs 20,000. Though all agricultural land is exempt from taxations, non-agricultural lands are liable to tax. Compensation for acquisition of urban agricultural land that is exempt from tax deduction at source attracts capital gains tax.  (Economic Times)