Agricultural Income and Taxation in India

Agricultural income refers to the total income earned by an individual by means of any agricultural sources, including land farming, commercial produce from horticultural land, or buildings on an agricultural land. Agricultural income plays a major role in the Indian economy as the agricultural sources employ a major Indian population. Moreover, according to the Indian Tax Act of 1961, agricultural income does not fall into the taxable category, so income from this source receives tax exemption. The Income Tax Act Section 10(1) states the exemption of agricultural income generated by any Hindu Undivided Family (HUF) or an individual from the taxable criteria.

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Understanding Agricultural Income

By definition, agricultural income includes revenue earned either by a HUF or an individual on their private agricultural land situated in India. Section 2(1A) of the Income Tax Act states the types of agricultural income in India:

Income from agricultural land revenue: Any income obtained by renting or leasing agricultural land or a building on agricultural land is source of agricultural income. This building on the agricultural land can either be a farmhouse, storehouse, or even a residential place.

Income from nurseries: Nursery income generated as a result of the trading of seeds, saplings, and replanted trees is also a part of agricultural income.

Income from agricultural business: This type of agricultural income includes income from any commercial agricultural operations such as food processing, textiles, jute, sugar, and production of other similar products.

Income from agricultural activities: The most basic source of agricultural income is the income obtained directly by cultivating on agricultural land. This includes growing crops, vegetables, and other agricultural products.

Sources of Agricultural Income

There can be multiple sources of agricultural income. Let us understand them in detail.

Income generated from any land that is used for agriculture and is situated in India.
Income or revenue that is generated as a result of agricultural operations, such as the sale of produce grown on agricultural land.
Income generated by any farmhouse or building that is given on rent or lease on agricultural land, provided that the tenant is a cultivator and the building that is rented is used as a warehouse or a store room.
Income generated as a result of the sale of saplings or seedlings. Additionally, the income from creepers, flowers, or replanted trees also falls under the category of agricultural income.

Faq

Taxability of Agricultural Income

According to Section 10(1) of the Income Tax Act of 1961, agricultural income has tax exemption from the taxation slab. This means that the citizens of India will not have to pay any tax on your agricultural income.

However, the state government imposes a tax on agricultural income based on a specific set of criteria. Following are the conditions to be met for an individual to fall under the state government taxation slab for their agricultural income:

The net agricultural income of an individual of Hindu Undivided Family is more than Rs 5,000 in the previous financial year.
The total income of the individual or the HUF after deducting the agricultural income is more than the exemption limit set by the government. The exemption limit set is Rs 2,50,000 for individuals below 60 years. For senior citizens (above 60 years), the exemption limit is Rs 3,00,000, and Rs 5,00,000 for super senior citizens (above 80 years).

Calculation of Tax on Agricultural Income

Though agricultural income is exempt from the taxation slab by the central government, an individual will be taxed on their agricultural income by the state government if they fulfill the above-mentioned criteria.

Here is the tax calculation of agricultural income upon fulfilling the above criteria:

Evaluate the sum of your combined income from non-agricultural sources and net agricultural income.
Evaluate the sum of your net agricultural income + the exemption limit set according to your age slab.
The difference between the amount obtained in steps 1 and 2 will be your final tax amount.

Agricultural Income and Its Impact on Tax Liability

Agricultural income of an individual is non-taxable, but it needs to be reported in Income Tax Return (ITR). According to the Income Tax Act, an individual with agricultural income of less than or equal to Rs 5,000 must file ITR1 and if agricultural income is more than Rs 5,000, the person must file ITR2.

Agricultural income of an individual directly or indirectly impacts their tax liability. If an individual earns only agricultural income, they do not have any tax liability, but their non-agricultural income will be taxable. If an individual earns Rs 2 lakhs as agricultural income and Rs 5 lakhs as non-agricultural income, this is how their income tax will be calculated:

Evaluation of the sum of agricultural income and basic minimum exemption limit. The total amount is Rs 2 Lakhs + 2.5 Lakhs = Rs 4.5 Lakhs.

Upto first Rs 2.5 Lakhs: None
On Rs 2 Lakhs: 5% Rate: Rs 10,000

Finally, calculate the total tax by subtracting the amount obtained from Step 1 and Step 2 (Rs 52,500 - Rs 10,000) = Rs 42,500.

Hence, the total tax for this individual will be Rs 42,500.

Evaluating the sum of agricultural and non-agricultural income.

Upto first Rs 2.5 Lakhs: None
On Rs 2.5 Lakhs: 5% Rate=Rs12,500
Remaining Rs 2 Lakhs: 20% Rate: Rs 40,000
Total is therefore (12500+40000)= Rs 52,500

Exclusions from Agricultural Income

The Income Tax Act of 1961 also lays down various income sources that are not considered to be agricultural income, so income from these sources is taxable, as stated in the Income Tax Act.

Following are some exclusions from agricultural income:

Income from livestock trading, poultry farming, and dairy products.
Income from bee hives.
Income from selling and cutting trees for lumber.
Income/dividend received from the agricultural earnings of a company.

These are a few exclusions from agricultural income according to the Income Tax Act, and are therefore, taxable by law.

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Frequently asked questions

What constitutes agricultural income in India?

Agricultural income is the income obtained by land production, land renting, agricultural operations, and even nursery earnings. However, it does not include livestock breeding, poultry farming, bee-hive businesses, and dairy farming.

How is agricultural income taxed in India?

According to the Income Tax Act of 1961, agricultural income in India is non-taxable. However, the state government imposes a tax under certain specific criteria on agricultural income.

Are there any exemptions for agricultural income under the Income Tax Act?

Yes, according to the Income Tax Act of 1961, agricultural income is exempt from tax.

How do I calculate tax if I have both agricultural and non-agricultural income?

Evaluate the tax on the sum of your agricultural and non-agricultural income, and the tax on the sum of your agricultural income and basic minimum exemption limit. Finally, subtract both the amount to find your final payable tax amount.

What are the key exclusions from agricultural income for tax purposes?

The key exclusions from agricultural income include poultry farming, livestock breeding, bee-hives earning, and tree cutting and selling.

How does agricultural income affect my overall tax liability?

Although agricultural income in India is tax-free, it can still impact your overall tax liability. This is because there are certain exceptions under which the agricultural income is taxable based on certain conditions, hence affecting your tax liability ultimately.

What income tax form should I use if I have agricultural income?

If you have an agricultural income up to Rs 5,000 you must fill out ITR1 otherwise, if your agricultural income is more than Rs 5,000, an ITR2 form shall be filled.

Can agricultural income push me into a higher tax bracket?

Since agricultural income in India is tax-free, it cannot push you in a higher tax bracket.

Is income from dairy farming considered agricultural income?

No, income from dairy products or dairy farming is not considered as agricultural income.

How can I show agricultural income in my income tax return?

You can fill out the ITR1 and ITR2 forms to show your agricultural income in your income tax return. If you have an agricultural income up to Rs 5,000 fill out ITR1. If your agricultural income is more than Rs 5,000, an ITR2 form needs to be filled.