In the Union Budget 2023-24 the government has allocated approximately 1.25 lakh crore for agriculture and its welfare scheme in India. It still serves as a primary source of income for about 70% of Indian households. As India is basically an agrarian economy, several incentives and perks are there, for those making a living through agriculture. Farmers are, for instance, exempt from paying any tax on their agricultural income under the income tax laws in India. However, not all income generated from agricultural land qualifies as agricultural income.
What is Agricultural Income?
As per section 2(1A) of the Income Tax Act, 1961, it is defined as follows.
- Rent or revenue is derived from land that is situated in India and is used for agricultural purposes.
- Income derived from such land by agriculture operations:
- Basic operations – The basic operations would include cultivation of the land and consequently sowing of seeds, planting, etc wherein human effort is involved in producing crops
- Subsequent Operations – The subsequent operations are operations for the growth and preservation of the produce like weeding, digging soil around the crops grown, etc. Also, those operations make the produce marketable like tending, pruning, cutting, harvesting, etc
- Income from the sale of agricultural produce:
- Where the produce does not undergo ordinary processes to become marketable, the income arising on sale would generally be partly agricultural income and part of it will be non-agricultural income. The Income Tax has prescribed rules to bifurcate agricultural and non-agricultural produce for various products
- Income derived from saplings or seedlings
- Income attributable to a farmhouse
- Any income is attributable to a farmhouse subject to the satisfaction of certain conditions specified in this regard in section 2(1A).
- The building should be on agricultural land or in the immediate vicinity of the agricultural land, or
- The land should not be located within the following region:
- Any income is attributable to a farmhouse subject to the satisfaction of certain conditions specified in this regard in section 2(1A).
| Aerial distance from municipality* | Population as per the last preceding census |
| Within 2 km | 10,000 to 1,00,000 |
| Within 6 km | 1,00,000 to 10,00,000 |
| Within 8 km | > INR 10,00,000 |
*Municipality includes a municipal corporation, notified area committee, town area committee, town committee, and cantonment board.
Note: Even where the local population is < 10,000, the land should also not be situated within the jurisdiction of the local municipality or cantonment board.
Non-agricultural income
As mentioned earlier, certain agriculture-related works and the income thus generated are categorized as non-agricultural income and are taxable.
- Heavy processing:
- When agricultural produce undergoes a process to become marketable, the final product is categorized as non-agricultural. For example, the production of tea, coffee, rubber, etc. Also, if a farmer sells processed items without carrying out any agricultural or processing operations, the income would be categorized as business income
- Breeding of livestock:
- This includes dairy animals, fishery, and poultry farming on agricultural land
- Tree plantation:
- Trees grown on farmland only to be used as timber, fall in the non-agriculture category, as no active agricultural business has been concluded in the entire process
- Trading:
- Those who earn their income by trading agricultural produce, have to pay standard taxes on their income
- Export:
- Income earned from the export of agricultural produce could be exempt from IT if certain conditions are met
Tax on Agricultural Income
Income from agriculture is exempt from tax under section 10(1) of the Income Tax Act, 1961. However, the Income-tax Act has laid down a method to indirectly tax such income. This method or concept may be called as the partial integration of agricultural income with other income. This method is applicable when the following conditions are met:
- Income from agriculture is more than INR 5,000.
- Also, Total income for the financial year, excluding agriculture income, should exceed INR 2,50,000. This limit will increase to INR 3,00,000 in the case of an individual who is above 60 and less than 80 and will be INR 5,00,000 for an individual who is above 80.
Calculation of Agricultural Income
In case, Agriculture income exceeds INR 5,000 and there are other sources of income too, then, the tax liability for that year is to be calculated following the procedure as under:
- Compute income tax on the aggregate income (i.e. agricultural income + other income) as per the prevailing income tax rates.
- Compute income tax on the sum of the amount of basic exemption limit plus agriculture income as per the prevailing income tax rates.
- Now, Compute (1) – (2) to arrive at the tax liability for the year.
Example
Suppose, a taxpayer has 6,00,000/- as interest income and 3,00,000/- as agriculture income for the A.Y. 2023-24. The computation shall be as follows:
- Calculate tax on total income of INR 9,00,000
| Particulars | Amount (INR) |
|---|---|
| Tax on INR 2,50,000 | Nil |
| Tax on the second 2,50,000 @5% | 12,500 |
| Tax on remaining INR 4,00,000 @ 20% | 80,000 |
| Total Tax (A) | 92,500 |
Calculate tax on basic exemption limit + agriculture income i.e.
| Particulars | Amount (INR) |
|---|---|
| Tax on INR 2,50,000 | Nil |
| Tax on the second INR 2,50,000 @ 5% | 12,500 |
| Tax on remaining INR 50,000 @20% | 10,000 |
| Total Tax (B) | 22,500 |
The tax liability, in this case, will be INR 70,000 (a-b) i.e.INR 92,500 – INR 22,500
Section 54B: Capital Gain on Transfer of Land used for Agricultural Purpose
Section 54B of the Income Tax Act,1961, provides relief to individuals who sell their agricultural land and buy another agricultural land from that sale. The following conditions must be met in order to claim benefit under section 54B:
- This benefit can only be claimed by individuals or HUF.
- The agricultural land must be used specifically for agricultural purposes.
- The individual or his/her parents must use this land for agricultural purposes for at least two years immediately preceding the date on which the exchange of land occurred. In the case of HUF, any member of the HUF must use this land for agricultural purposes.
- After selling agricultural land, the assessee will have to buy another agricultural land within two years from the date of selling.
- In case of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation.
- The entire amount of capital gains must be utilized for the purchase of agricultural land if not then the difference will be termed as capital gains and the tax will be computed accordingly.
- The new agricultural land must not be sold within a period of 3 years from the date of purchase.
Which ITR is applicable for Agricultural Income
If the aggregate agricultural income of the assessee is up to INR 5,000 disclose the same in the income tax return (ITR) 1. But if the agricultural income exceeds INR 5,000, then form ITR 2 applies.
Moreover, if the income from agriculture exceeds INR 5 lakh it is to be reported separately for each agricultural land under the ‘exempt income schedule’ along with additional details such as the name of the district with pin code, measurement of land, whether owned or leased, and whether irrigated or rain-fed.
FAQs
If the income of the assessee is less than 5000 and the total income, excluding agriculture income is less than the basic exemption limit then only agricultural income is exempt from income tax.
The following activities are not considered:
1. Breeding of livestock
2. Dairy farming
3. Fisheries
4. Poultry farming
In the case of growing of tea, 40% of income is taxable as business income and the balance will be exempt as agriculture income.
The agricultural income derived from agricultural operations carried out on urban or rural land is exempt from taxes.
Hey @riya_gupta
In such a case, the tax liability for that year is calculated following the procedure as under:
For more details on this, you can refer to this article.