Tax Column

I am a resident. I have sold one residential house in Mumbai during the financial year 2025-26. Under Section 54 of the Income Tax Act, I am entitled to invest the capital gain in another residential house. Whether can I invest in a residential house in London where my son is settled? Kindly clarify. [EasyDNNnews:PaidContentStart]

Under the Indian laws, you can certainly invest in a residential house in London through the Liberalised Remittance Scheme. However, such investment in a house in London is not eligible for deduction under Section 82 of the Income Tax Act, 2025 (Section 54 of the earlier Income Tax Act, 1961). Section 82(1)(b) of the Income Tax Act makes it very clear that the new residential house has to be in India. Therefore, investment in a residential house in London is not eligible for deduction from long-term capital gain which you made on sale of your Indian residential house. 

I am a Resident in India. I went to the U.S. for a holiday where I met with an accident while having dinner at a restaurant where a fire broke out and several people were injured. I was also hospitalised and received treatment. Subsequently, the restaurant owner, a foreign company, paid every injured person compensation. I also received USD 50,000 in the financial year 2025-26. Whether is the compensation received taxable in India?

Since you are a Resident in India, all your global receipts are subject to tax in India. Therefore, compensation received abroad is not relevant in your case. The question is whether compensation of USD 50,000 is a capital receipt or a revenue receipt which falls under the definition of income under Section 2(49) of the IT Act, 2025 (corresponding Section 2(24) of the IT Act, 1961). 

The Courts have held that compensation for personal injury, pain or suffering or loss of earning capacity is generally treated as a capital receipt. Such receipts do not arise out of carrying on any business activity nor are they in the nature of return on investment. 

Capital receipts are not taxable unless specifically brought under the charging provisions of the Income Tax Act. Compensation for personal injury, pain, etc., is not specifically brought under the charging provisions. Therefore, in my opinion, it is a capital receipt and not chargeable to tax in India. 

Further, such compensation does not come within the ambit of Section 56(2)(x) of the IT Act (Section 92(2) of the IT Act, 2025). A legal settlement is normally paid in exchange for your relinquishment of your right to sue the restaurant owner and therefore it cannot be said that compensation is received without any consideration. As such, USD 50,000 would stay outside the ambit of this particular section. 

However, you must disclose the compensation in the tax return under the head Exempt Income. You may face legal challenges in tax assesSMEnt but have a fair chance of succeeding at the appellate stage. Keep all your medical reports and the Settlement Compensation Letter from the foreign company as these are vital documents to establish the nature of receipt, i.e., capital receipt in your case. 

I am working in a multi-national company in India. Whether Leave Travel Allowance (LTA) is still available under the new Income Tax Act 2025? 

Yes, under the New Income Tax Act 2025, Schedule III (8), it is available. Under the new Act, LTA exemption is available only for travel within India, and that too if you have opted for the tax rate under the Old Tax Regime. Further, the exemption is restricted to actual travel fare for employees and dependent family members and excludes hotel, food and sight-seeing expenses. Further, an individual can claim LTA for only two (2) journeys within a block period of 4 years. The employer is supposed to verify all the relevant documents and the calculation of LTA. The amount of LTA is to be reported in Form 16 (Form 130 in the New Act). 

Recently, I have purchased rural agricultural land for a total consideration of `2 crore. The stamp valuation on which I have paid the stamp duty is `3 crore. I was under the impression that since rural agricultural land is exempt from capital gain and income earned thereon, deeming Section 56(2)(x) of the I T Act is also not applicable. Whether my thinking was right; if not, what are the consequences? 

Under the deeming Section 56(2)(x) of the I T Act 1961 (New Section 92 of I T Act 2025), if the actual consideration paid is less than the stamp duty valuation of immovable property, then the difference is taxable as deemed income under the head Income from Other Sources. Immovable property comprising land and building also includes rural agricultural land. The provision of Section 56(2)(x) of the I T Act 1961 (New Section 92 of I T Act 2025) is an anti-abuse tax provision and, therefore, applicable in respect of all immovable properties, including agricultural land. 

Accordingly, the difference of `1 crore would be taxable under Section 56(2)(x) of the I T Act 1961 (New Section 92 of I T Act 2025) as Income from Other Sources. The capital gain is specifically exempt under Section 2(14) of the I T Act as it excludes rural agricultural land from the definition of Capital Asset. There is no such exemption provision in Section 56(2)(x) of the I T Act. Further, income earned on any agricultural land is exempt under Section 10(1) of the I T Act 1961 (Schedule II(1) of I T Act 2025). Therefore, in my opinion, `1 crore would be taxed under Section 56(2)(x) of the I T Act 1961/Section 92 of Finance Act 2025. 

We would be happy to address your tax-related queries. Kindly share them with us at editorial@dsij.in

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