Agriculture, alongside its allied sectors, exists as one of the largest sources of livelihood in India. Figures ascertained by the Food and Agriculture Organisation (FAO) indicate that agriculture still serves as a primary source of income for about 70% of the Indian rural households. The government, therefore, endeavours to boost this sector by means of schemes, policies, and tax exemptions for agricultural income.
Agriculture is said to be the primary occupation in India. It is usually the only source of income for the large rural population in India. The country as a whole is entirely dependent on agriculture for its basic food requirements. The government has numerous schemes, policies and other measures to promote growth in this sector – one of them being an exemption from income tax.
What is Agricultural Income?
Agricultural income refers to the income earned or revenue generated from sources essentially premised on agricultural activities. These sources of income include farming land, buildings on or identified with agricultural land as well as commercial produce from a horticultural land.
Section 2(1A) of the Income Tax Act, 1961, lays down the definition of ‘agricultural income’ under the following three activities:
- Rent or revenue derived from agricultural land situated in India and used for agricultural purposes.
- Income earned from agricultural land through the commercial sale of produce gained from this land.
- Revenue derived from renting or leasing of buildings in or around agricultural land. However, this criterion is subject to the following conditions:
- This building should be occupied by a farmer or cultivator through revenue or rent.
- It is used as a residential space, warehouse/storeroom, or outhouse.
- The land on which this building is located is assessed for land revenue or a local rate evaluated and collected by government officers.
Categorising a particular amount earned as agricultural income takes into account several other factors, such as:
- Existence of land: The income earned should be from an existing piece of land.
- Utilisation of land for agricultural purposes: Rent or revenue from the agricultural land and income earned by a cultivator through the sale of produce should be based on agricultural operations on a piece of land. Alongside income from agricultural operations, the ambit of agricultural income also includes operations undertaken to make produce marketable.
- Cultivation of land is mandatory: The income should be generated by way of cultivation of land. Agricultural income covers all land produce such as grain, fruits, commercial crops, etc. However, it does not include using a piece of land for poultry farming, breeding of livestock, dairy farming, and the like.
- Ownership of land is optional: In the case of agricultural operations, the law does not necessitate the cultivator to be the owner of the land in question. However, in the case of rent or revenue, it is essential that an individual possesses an interest in the land, either as an owner or a mortgagee.
Examples of Agricultural Income
The following are some the examples of agricultural income:
- Income from the sale of seeds.
- Income from the sale of replanted trees.
- Interest on capital received by a partner from a firm engaged in agricultural operations.
- Income from growing flowers and creepers.
- Rent received for agricultural land.
- Profits received by a partner from a firm involved in agrarian produce or activities.
- Income from growing of bamboo.
Examples of Non-Agricultural Income
Below are some examples of non-agricultural income:
- Income from poultry farming.
- Income from agricultural land held as stock-in-trade
- Any dividend paid from an organization’s agriculture income.
- Income from dairy farming.
- Income from bee hiving.
- Income from fisheries.
- Income from cutting and selling timber trees.
- Income from butter and cheese making.
- Receipts from TV serial shooting in the farmhouse.
Types of Agricultural Income
| Basis of Differentiation | Types of Agricultural Income | ||
| Source of income | Rent or revenue generated from a piece of land. | Income derived from agricultural operations. | Income from a building attached to agricultural land. |
| Example of agricultural income | Rent received by an owner of the land from the cultivator in cash or in-kind. | Income earned by a cultivator by way of sale of his/her produce. | Rent received on a building used as a warehouse by a cultivator. |
Agricultural Income in Income Tax
Under Section 10(1) of the ITA, 1961, agricultural income is exempt from taxation. This exemption implies that the Central Government does not impose or levy any tax on agricultural income.
However, agricultural income tax persists at the state level. The legislature uses a method called partial integration of agricultural income with non-agricultural income to tax such earnings. This method is applicable when the conditions mentioned below are met by an individual:
- Net agricultural income was more than Rs. 5,000 in the previous financial year.
- Total income, minus this net agricultural income, is higher than the exemption limit of Rs. 2,50,000 for individuals below 60 years of age, Rs. 3,00,000 for senior citizens and Rs. 5,00,000 for super senior citizens.
Taxation of Agricultural Income
However, the Income-tax Act has laid down a method to indirectly tax such income. This method or concept may be called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.
Applicability:
This method is applicable to individuals, HUFs, AOPs, BOIs, and artificial juridical persons, when the following conditions are met:
- Net agricultural income is greater than Rs. 5,000 during the year; and
- Non-agricultural income is above the basic exemption limit:
- Greater than Rs 2.5 lakh for individuals below 60 years of age and all other applicable persons (old regime)
- Greater than Rs 3 lakh for individuals between 60 – 80 years of age(old regime)
- Greater than Rs 5 lakh for individuals above 80 years of age(old regime)
- Greater than Rs 3 lakh irrespective of the age of the person (new regime)
In simple terms, the non-agricultural income should be greater than the maximum amount not chargeable to tax (as per the slab rates).
Thus companies, firms/LLP, co-operative societies, and local authorities are excluded from using this method.
Calculation of Agricultural Income Tax
Step 1: Evaluating tax on non-agricultural income + net agricultural income.
Step 2: Calculation of tax on net agricultural income + maximum exemption limit as per slab rates.
Step 3: Calculation of the final tax as a difference of the figures derived in Steps 1 and 2. This step derives the following –
- Deduction of a rebate, if available.
- Addition of surcharge, if applicable.
- Addition of Health and Education Cess.
The example discussed below provides a detailed explanation of this process –
An individual taxpayer aged 50 years earns Rs. 3,00,000 in agricultural income. Her non-agricultural income is worth Rs. 5,00,000. Therefore, her agriculture income tax for the FY is calculated as follows:
| Step 1: Evaluating tax on non-agricultural income + net agricultural income, i.e., Rs. 8,00,000 (Rs. 3,00,000 + Rs. 5,00,000) Tax on the first Rs. 2,50,000 = Nil Tax on the second Rs. 2,50,000 = Rs. 2,50,000 x 5% = Rs. 12,500 Tax on balance Rs. 3,00,000 = Rs. 3,00,000 x 20% = Rs. 60,000 So, the total tax on non-agricultural income + net agricultural income is Rs. 72,500. (1) |
| Step 2: Calculation of tax on net agricultural income + maximum exemption limit as per slab rates, i.e., Rs. 5,50,000 (Rs. 3,00,000 + Rs. 2,50,000)Tax on the first Rs. 2,50,000 = Nil Tax on next Rs. 2,50,000 = Rs. 2,50,000 x 5% = Rs. 12,500 Tax on balance Rs. 50,000 = Rs. 50,000 x 10% = Rs. 10,000 So, the total tax here stands as Rs. 22,500. (2) |
| Step 3: Calculation of the final tax as a difference of the figures derived in Step 1 and 2. The difference between (1) and (2) is Rs. 50,000 (Rs. 72,500 – Rs. 22,500). So, final tax = Rs. 50,000 (+) Health and Education cess @ 4% = Rs. 2000 Therefore, her total tax liability amounts to Rs. 52,000. |
FAQs
Tax Benefit Under Section 54B?
- The taxpayer should be an individual or HUF.
- The asset transferred should be agricultural land, whether a long-term or short-term capital asset.
- The agricultural land should be used for agricultural purposes for at least two years immediately preceding the date of transfer of land.
- The taxpayer should acquire/purchase another agricultural land within two years from the transfer date.
The exemption amount under section 54B is the lower of the following:
- Amount of capital gains arising on transfer of agricultural land.
- Investment in a new agricultural land or the amount deposited in the Capital Gains Deposit Account Scheme.
Which ITR to File for Agricultural Income?
Agricultural income is to be shown under the column of Agriculture Income in ITR-1. But ITR-1 applies only when the agricultural income is up to Rs 5,000. In case it exceeds the limit of Rs.5,000, ITR-2 form must be filed.
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