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Agricultural Income - Tax Treatment

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Laxmi Navlani

Agriculture Income
Income Heads
Income Tax

In India, agricultural income refers to income earned from sources that include farming land, renting agricultural land and selling agricultural  produce. 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 agriculture income under the income tax laws in India. However, not all income generated from agricultural land, qualify as agricultural income. Therefore, it’s pertinent to know the difference between incomes that fall in the agricultural category and the non-agricultural category

What is Agricultural Income?

Agricultural income as per section 2(1A) of the Income Tax Act, 1961 is as follows.

According to this Section, agricultural income generally means:

Aerial distance from municipality* Population as per last preceding census
Within 2 kms 10,000 to 1,00,000
Within 6 kms 1,00,000 to 10,00,000
Within 8 kms > INR 10,00,000

*Municipality includes 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, is categorized as non-agricultural income and is taxable.

Tax Calculation with 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 non-agricultural income. This method is applicable when the following conditions are met:

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:

Example

Suppose, taxpayer has 4,00,000/- as interest income and 90,000/- as agriculture income for the assessment year 2019-20. The computation shall be as follows:

Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 2,40,000 @ 5% 12,000
Total Tax 12,000

 

Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 90,000 @ 5% 4,500
Total Tax 4,500*

The tax liability, in this case, shall be Rs. 7,500 (a-b) i.e. INR 12,000 – INR 4,500 and there’s no extra tax payable owing to the extra income of agriculture.

Section 54B: Capital Gain on Transfer of Land used for Agricultural Purpose

Section 54B of the Income Tax Act, 1962, provide 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:

Which ITR is applicable for Agricultural Income

If the aggregate agricultural income of the assessee is up to Rs. 5,000 disclose the agricultural income in the income tax return (ITR) 1. But if the agricultural income exceeds Rs. 5,000, then form ITR 2 applies

Moreover, Agricultural income exceeding Rs 5 lakh 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

Is agricultural income wholly exempt from income tax?

If income of assessee is less than 5000 and total income, excluding agriculture income is less than the basic exemption limit then only agricultural income exempt from income tax.

What is not considered as agricultural income in India?

Following are not considered as agriculture income
1. Breeding of livestocks
2. Dairy farming
3. Fisheries
4. Poultry farming

Does the income from business of growing tea is an agriculture Income?

In case of growing of tea 40% income is taxable as business income and balance will be exempt as agriculture income.

Got Questions? Ask Away!

  1. Hey @riya_gupta

    In such a case, the tax liability for that year is 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 sum of 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.

    For more details on this, you can refer to this article.