On 10th January 2026, Amit (a bank employee) received ₹6,00,000 towards interest on enhanced compensation from State Government in respect of compulsory acquisition of his land effected during the financial year 2021-22.

Section 145B provides that interest received by the assessee on enhanced compensation shall be deemed to be the income of the assessee of the year in which it is received, irrespective of the method of accounting followed by the assessee and irrespective of the financial year to which it relates. Section 56(2)(viii) states that such income shall be taxable as 'Income from other sources. 50% of such income shall be allowed as deduction by virtue of section 57(iv) and no other deduction shall be permissible from such Income. Therefore, legal expenses incurred to receive the interest on enhanced compensation would not be allowed as deduction from such income. Computation of interest on enhanced compensation taxable as "Income from other sources" A.Y 2026-27 Particulars Amount (₹) Interest on enhanced compensation taxable u/s 56(2)(viii) 6,00,000 The principal amount of enhanced compensation is taxed under the head "Capital Gains," whereas only the interest on it is taxed as "Other Sources" Less: Deduction under section 57(iv) (50% x ₹6,00,000) (3,00,000) ₹50,000 spent by Amit on legal expenses is not deductible. The 50% statutory deduction is intended to cover all types of expenses incurred to earn this interest. Taxable interest on enhanced compensation 3,00,000