Agricultural Income – Tax Treatment

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:

  • Rent or revenue derived from land:
    • Any rent or revenue derived from land which is situated in India and is used for agricultural purposes
  • Income derived from such land by agriculture operations:
    • The meaning of agriculture though not covered in the Act has been laid down by the Supreme Court in the case CIT v. Raja Benoy Kumar Sahas Roy where agriculture has been explained to consist of two types of operations:
      • Basic operations – The basic operations would include cultivation of the land and consequently sowing of seeds, planting, etc wherein human effort involved in producing crops
      • Subsequent Operations – The subsequent operations are operations for 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 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:
    • Any income derived from saplings or seedlings grown in a nursery shall be agriculture income too. Moreover, No tax liability arises on the income generated through sale of products grown in a nursery provided:
      • Assessment of land revenue by the local
      • The land should not be within the jurisdiction of a municipality or a cantonment board where the revenue is not not subject to local rate
  • Income attributable to a farm house
    • Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).
      • The building should be on agricultural land or in immediate vicinity of the agricultural land, or
      • The land should not be located within the following region:
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.

  • Heavy processing: 
    • When an agricultural produce undergoes a process to become marketable, the final product is categorised 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 categorised 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 agriculture produce, have to pay standard taxes on their income
  • Export: 
    • Income earned from the export of agriculture produce, could be exempt from IT if certain conditions are met

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:

  • Income from agriculture should be 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 3,00,000 in case of individual who is above 60 and less 80 and will be 5,00,000 for 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 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.

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:

  • Calculate tax on total income of INR 4,90,000
Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 2,40,000 @ 5% 12,000
Total Tax 12,000

 

  • Calculate tax on basic exemption limit + agriculture income i.e.
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:

  • This benefit can only be claimed by individuals or HUF.
  • The agricultural land must be used specifically for agricultural purpose.
  • The individual or his/her parents must use this land for agricultural purpose 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 purpose.
  • 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 the period of 3 years from the purchase.

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.