Yes, interest received on compensation or enhanced compensation is taxable under the Income Tax Act, 1961. The tax treatment depends on the nature of the compensation and the provisions applicable.

1. Interest on Compensation for Land Acquisition (Section 56(2)(viii))

• If interest is received on compensation or enhanced compensation awarded for compulsory land acquisition, it is taxed under “Income from Other Sources.”
• Tax Rate: It is taxable at slab rates applicable to the recipient.
• Exemption (Section 10(37)): If the land acquired was agricultural land in a rural area, the compensation itself is exempt from tax, but the interest remains taxable.

2. Interest on Compensation in Other Cases

• If compensation is awarded in cases other than land acquisition (e.g., motor accident claims, delayed payments, consumer disputes, etc.), the interest component is taxable as Income from Other Sources.
• Example: Interest on delayed payment of salary, compensation from court cases, etc., is also taxable.

3. Taxability in the Year of Receipt

• As per Section 145B, interest on compensation or enhanced compensation is taxed in the year it is received, irrespective of the year in which it was accrued.
• However, 50% deduction is allowed under Section 57(iv), meaning only 50% of the interest amount is taxable.

Conclusion

Interest on compensation, whether from land acquisition or other legal claims, is taxable under “Income from Other Sources.” However, if it is related to land acquisition, only 50% of the interest is taxable after deduction under Section 57(iv). The compensation itself (excluding interest) may be exempt depending on the nature of the asset involved.