Section 278 of the Income-tax Act, 2025 — Taxability of Certain Income (Interest on Compensation, Escalation Claims & Export Incentives)

In plain language

What Section 278 actually deals with (scope check)

Important scope clarification: Section 278 of the Income-tax Act, 2025 is not a reassessment or "assessment-notice" provision. Its official heading is "Taxability of certain income." It is a timing rule that decides in which tax year three specific types of income become taxable. It is the direct successor to Section 145B of the Income-tax Act, 1961. (Reassessment / income escaping assessment sits at Sections 279 to 286 of the 2025 Act — see the related links.) So if you landed here expecting reassessment notices, the notices provisions are 279 to 286; this section is about year of taxability.

The three incomes covered

• Interest on compensation or enhanced compensation: Taxed in the tax year in which it is received — even if it relates to earlier years and even if you follow the mercantile (accrual) system. This overrides the normal method-of-accounting rule (Section 276 of the 2025 Act).
• Escalation of price in a contract, and export incentives: Taxed in the tax year in which "reasonable certainty of its realisation is achieved." This prevents disputes about whether to book an uncertain claim early.
• Certain deemed income under Section 2(49)(w) (broadly, government/authority subsidies, grants, cash assistance, duty drawback, waiver, concession or reimbursement — the 2025 Act's version of the old Section 2(24)(xviii)): Taxed in the tax year in which it is received, unless it has already been charged to tax in an earlier year.

Who it applies to

• Anyone receiving interest on compensation — most commonly land acquisition claimants, motor-accident (MACT) awardees, insurance/legal settlements where the court awards interest.
• Contractors and exporters who raise price-escalation bills or claim export incentives (duty drawback, RoDTEP-type incentives, etc.).
• Businesses receiving government grants and subsidies not otherwise reduced from the cost of an asset.

Why the "year of receipt" rule matters

Compensation disputes and enhanced compensation can drag on for years and then get paid as a lump sum with a big interest component. Without a special rule, an accrual-basis taxpayer might have to spread that interest over many past years and reopen old returns. Section 278 simplifies this by taxing the whole interest in the single year you actually receive the money. To soften the bunching, a companion relief applies.

The linked 50% deduction (Section 93)

• Interest on compensation/enhanced compensation is charged under the head "Income from other sources."
• A flat 50% deduction is allowed against such interest under Section 93 of the 2025 Act (successor to Section 57(iv) of the 1961 Act). No other deduction (e.g., legal fees) is allowed against it.
• Net effect: only half of the interest is effectively taxed.

How it interacts with other provisions

• Section 276 (method of accounting): Section 278 overrides it for these three incomes — receipt/certainty basis wins over accrual.
• Section 92 / 93 (Income from other sources and its deductions): the interest is charged under this head and gets the 50% deduction.
• Reassessment (Sections 279 to 286): a different subject entirely; those decide when the department can reopen a year.

Practical implications

• Don't offer interest on compensation year-by-year on accrual; offer the whole amount in the year of receipt, then claim the 50% deduction.
• Keep the court/authority order and TDS certificate — banks/authorities often deduct TDS on such interest.
• Exporters and contractors should recognise escalation/incentive income only once realisation is reasonably certain, not on mere raising of a claim.