Taxability of certain income
[Section-278 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 278(1) of Income Tax Act 2025
278(1) The interest received by an assessee on any compensation or on enhanced compensation, shall be deemed to be the income of the tax year in which it is received, irrespective of anything to the contrary contained in section 276.
Section 278(2) of Income Tax Act 2025
278(2) Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the tax year in which reasonable certainty of its realisation is achieved.
Section 278(3) of Income Tax Act 2025
278(3) The income referred to in section 2(49)(w) shall be treated as the income of the tax year in which it is received, if not charged to income-tax in any earlier tax year.
FAQs on Section 278 of Income Tax Act 2025
What is the tax treatment of interest received on compensation or enhanced compensation under Section 278(1)?
The interest received on any compensation or enhanced compensation is deemed to be the income of the tax year in which it is actually received, even if Section 276 states otherwise.
Is the interest on compensation taxed in the year of accrual or the year of receipt?
It is taxed in the year of receipt, regardless of when it accrued.
Does the receipt of compensation-related interest override other provisions like Section 276?
Yes, Section 278(1) explicitly overrides any contrary provision in Section 276, mandating taxation in the year of receipt.
How is income from price escalation claims in contracts treated under Section 278(2)?
Income from escalation of price in a contract is deemed to be income of the year in which there is reasonable certainty of its realization.
When is export incentive income recognized for tax purposes under Section 278(2)?
Export incentive income is recognized in the tax year when it becomes reasonably certain that it will be realized.
What does “reasonable certainty of realization” mean in Section 278(2)?
It means the point at which the assessee has a clear and justifiable expectation of receiving the amount, based on contractual or official confirmations or other reliable evidence.
If escalation income is uncertain in one year but becomes certain later, in which year is it taxed?
It is taxed in the year in which reasonable certainty of realization is achieved.
How is income under Section 2(49)(w) treated if not taxed earlier, as per Section 278(3)?
If the income defined in Section 2(49)(w) was not taxed in an earlier year, it will be taxed in the year in which it is actually received.
What is the purpose of Section 278(3)?
Section 278(3) ensures that income under Section 2(49)(w), if not previously charged to tax, is brought to tax in the year of receipt.
Can the income under Section 2(49)(w) escape tax if not assessed earlier?
No, Section 278(3) ensures it is taxed upon receipt, even if it was not taxed earlier.
Is the receipt-based taxation under Section 278(1) to (3) applicable to all types of income?
No, it applies specifically to interest on compensation, escalation claims, export incentives, and income referred in Section 2(49)(w).
Can a taxpayer defer tax liability by delaying recognition of escalation or incentive income?
No, once there is reasonable certainty of realization, the income becomes taxable under Section 278(2), regardless of actual receipt.
What happens if an income was already taxed earlier but received later?
Section 278 applies only when the income has not been taxed earlier. If already taxed, it is not taxed again on receipt.
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