Chapter XVI - Procedure for Assessment
Section 278
Section 278: taxability of certain income
Section 278 overrides the normal method-of-accounting rule in Section 276 for three specific kinds of receipts, and fixes exactly which tax year each is taxed in.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Any 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.
(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.
(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.
Introduction
Section 278 sets the tax year for interest received on compensation or enhanced compensation, certain price-escalation and export-incentive claims, and government assistance described in section 2(49)(w).
The interest and qualifying government assistance rules focus on receipt, while contract price-escalation claims and export incentives are recognised when realisation becomes reasonably certain.
Key takeaways
Compensation interest follows receipt
Interest on compensation or enhanced compensation is taxed in the tax year in which it is received.
Contract or export claims differ
A price-escalation or export-incentive claim is brought to tax when reasonable certainty of realisation is achieved.
A third receipt rule
Income described in section 2(49)(w) is taxed on receipt if no earlier tax year has already charged it.
Interest on compensation or enhanced compensation
Any interest an assessee receives on compensation or on enhanced compensation is deemed to be the income of the tax year in which it is received, irrespective of anything to the contrary in section 276 (the general method-of-accounting rule).
Price escalation and export incentive claims
Any claim for escalation of price in a contract, or for export incentives, is deemed to be the income of the tax year in which reasonable certainty of its realisation is achieved.
Income under Section 2(49)(w)
Income referred to in section 2(49)(w) is treated as the income of the tax year in which it is received, if it has not already been charged to income-tax in any earlier tax year.
Step-by-step flow for the timing rules in Section 278
- 1
Is it interest received on compensation or on enhanced compensation?
- Yes: It is income of the tax year in which it is received, whatever method of accounting is followed under section 276 (Section 278(1)).
- No: Go to the next step.
- 2
Is it a claim for escalation of price in a contract, or an export incentive?
- Yes: It is income of the tax year in which reasonable certainty of its realisation is achieved (Section 278(2)).
- No: Go to the next step.
- 3
Is it income referred to in section 2(49)(w)?
Section 2(49)(w) covers assistance such as a subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement from a government, authority, body or agency, with the exceptions stated there.
- No: Section 278 does not apply; timing follows the method under section 276.
- Yes: Go to the next step.
- 4
Was it charged to income-tax in an earlier tax year?
- No: It is income of the tax year in which it is received (Section 278(3)).
- Yes: Section 278(3) does not tax it again on receipt.
Practical checklist
Do
- Separate compensation principal from interest when recording a receipt.
- For a government subsidy, grant, cash incentive or similar assistance under section 2(49)(w), check the receipt year and whether it was taxed earlier.
Avoid
- Automatically place every later receipt in the original year of the underlying compensation or contract claim.
Illustrative example
Worked example: two items received in tax year 2027-28
Hypothetical facts (illustration only, not a real taxpayer): A construction company follows the mercantile system. On 15 November 2027 it receives interest of ₹4,50,000 on enhanced compensation for land acquired from it, the interest relating to several earlier years. It had also raised a price-escalation claim of ₹12,00,000 on a contract in 2026-27; the employer disputed it and accepted it in writing only in January 2028. Assume that this acceptance is the point at which reasonable certainty of realisation is achieved. All amounts are assumed for illustration.
Interest on enhanced compensation
Under Section 278(1), the full ₹4,50,000 is income of tax year 2027-28, the year of receipt, despite the mercantile system and the earlier periods it relates to.
Escalation claim
Under Section 278(2), the ₹12,00,000 is income of the year in which reasonable certainty is achieved: 2027-28 on the assumed facts, not 2026-27 when it was raised.
Total for 2027-28
₹4,50,000 + ₹12,00,000 = ₹16,50,000 falls in tax year 2027-28 under these two rules.
Outcome
- Both items are income of tax year 2027-28.
- When reasonable certainty is achieved is a question of fact; the company should keep the evidence that fixes the date.
Frequently asked questions
When is interest on enhanced compensation taxed?
In the tax year in which it is actually received, irrespective of the assessee's regular method of accounting under section 276.
When is a price-escalation or export-incentive claim taxed?
In the tax year in which reasonable certainty of its realisation is achieved, rather than automatically on accrual or receipt.
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Talk to our tax team about this sectionLast updated 9 October 2026