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Agricultural Income in Income Tax: How is it Treated

Updated: May 24


Agricultural Income in Income Tax: How is it Treated

In India, one of the main sources of income is agriculture and its related industries. According to data gathered by the Food and Agriculture Organisation (FAO), over 70% of rural households in India still rely primarily on agriculture for their income. Therefore, through programmes, regulations, and tax breaks for agricultural revenue, the government works to promote this industry. Since agricultural income is taxed differently under the two tax regimes, it is imperative to understand "what is agriculture income." The overall revenue received by a person or organization from all sources, such as land farming, commercial produce grown on horticultural land, and structures constructed on designated agricultural land, is referred to as agriculture income. Section 2(1A) of the Income Tax Act of 1961 defines an individual's or entity's agricultural revenue. In this guide, we will explain agricultural income and its tax treatment in detail.

 

Table of Content

 

Understanding Agricultural Income

The entire money received by a person or organization from carrying out agricultural operations on designated agricultural land is referred to as agriculture income. The Income Tax Act of 1961's Section 2(1A) defines farm income in terms of the following activities.


Revenue or rent received from Indian agricultural land

The money paid in exchange for the right to utilize the land is known as rent. Land can be used to generate revenue in a variety of ways. Fees earned for the renewal of a land grant under lease would be one example. Nevertheless, the definition of agricultural income does not include the proceeds from the sale of land. 


Income from agricultural land

  • Agriculture: The fundamental tasks would involve tilling the land after it has been cultivated, planting, seeding, and other tasks requiring human skill and effort on the actual land. Other activities include weeding, tilling soil around crops, and other tasks that help the produce grow and preserve it. Further, it also includes tasks like tending, trimming, cutting, harvesting, and other tasks that help the product be fit for the market. Agricultural income would also include revenue from seedlings or saplings raised in nurseries, regardless of whether the fundamental activities were done on land.

  • By carrying out a procedure that certifies the agricultural product as fit for sale by the grower or the recipient of rent (in kind): These procedures entail mechanical or manual actions that are typically used to preserve the agricultural product's inherent qualities while making it suitable for the market. 

  • By selling such agricultural produce: If the produce is not subjected to standard procedures to make it marketable, a portion of the proceeds from the sale will often be classified as non-agricultural (taxable) and a portion as agricultural (exempt) revenue.

Furthermore, to make this distinction between agricultural and non-agricultural produce for goods like tea, coffee, rubber, etc., the Income Tax has established regulations.



Table of Income from agricultural land

Income from farm buildings for agricultural operations

The following criteria must be met for income from farm building to be classified as agricultural income: 

The structure should be situated on the agricultural field or close by. Additionally, because of his relationship to the property, the landowner or renter utilises the building for these kinds of purposes, such as a storeroom or as a place to live. One of the two requirements ought to be met: 

  • Government officials either use land revenue or a local rate to determine and collect the assessment of the land; OR 

  • If the aforementioned need is not met, the land shouldn't be situated in the following area:


Income from farm buildings for agricultural operations

Examples of Agricultural and Non-Agricultural Income in India


Examples of Agricultural and Non-Agricultural Income in India

Taxability of Agricultural Income in India

For taxation purposes, agricultural revenue in India is considered differently from other forms of income. According to the Income Tax Act, income from agriculture is excluded from income tax and does not count towards the total amount of income used to determine the tax due. Section 10(1) exempts agricultural income from taxation. This exemption suggests that there is no tax on agricultural revenue levied or imposed by the Central Government. State-level agricultural income taxes still exist, though. To tax such revenues, the legislature implements a technique called partial integration of agricultural income with non-agricultural income. 


Applicability of Tax Exemption for Agricultural Income 

In the following situations, there is a full tax refund on agricultural income: 

  • If your total agricultural income is less than Rs. 5,000 per year

  • If your income from agricultural land is your only source of income, meaning you have no other sources of income

  • If your total income, excluding your agricultural income, is less than the basic exemption limit and you have both other and agricultural income. 

Income from non-agricultural sources exceeds the base exemption amount: 

  • More than Rs 2.5 lakh for people under 60 and for everyone else who qualifies

  • Over Rs 3 lakh for people in the age range of 60 to 80 

  • More than Rs 5 lakh for people over the age of 80

However, if your income from agriculture exceeds Rs. 5,000 and you also have other sources of income, the following formula should be used to determine your tax due for that year. This formula applies to individuals, HUFs, AOP/BOIs, and artificial juridical persons. 

  • Using the current income tax rates, calculate income tax on the total income (agricultural revenue plus other income) (without surcharge and cess)

  • Apply the current income tax rates to the total of the basic exemption limit plus agricultural income (without surcharge and cess)

  • Next, compute (1) through (2) to find the annual tax liability. (If applicable, add cess and fee)


Calculation of Tax on Agricultural Income

Despite the fact that income from agriculture is not subject to income tax in India, the Income Tax Act of 1961 outlines a procedure for indirectly taxing such revenue. It combines the aforementioned requirements with a portion of the income from both agriculture and non-agriculture. The following three steps are used to determine the farm income tax if an individual or company meets the aforementioned requirements: 

Step 1: Calculating the tax due on net agricultural income plus non-agricultural revenue. 

Step 2: Determining the tax based on the net agricultural revenue plus the maximum exemption amount according to the relevant tax slab. 

Step 3: Subtracting the amount of step 2 from the amount of step 1 to arrive at the ultimate tax amount. The information provided by this step is as follows: 

  • Withholding of any applicable tax refund. 

  • The inclusion of a surcharge, if relevant. 

  • The Health and Education Cess is added. 


Illustration

A taxpayer receives agricultural income of Rs. 3,00,000. His earnings from non-agricultural sources are Rs. 5,00,000. As a result, the following is how his agriculture income tax for the financial year is determined:

Step 1: Tax on non-agricultural income + net agricultural income (Rs. 3,00,000 + Rs. 5,00,000= Rs. 8,00,000)

Tax on the first Rs. 2,50,000 = Nil

Tax @5% on the second Rs. 2,50,000 = Rs. 12,500

Tax @20% on balance Rs. 3,00,000= Rs. 60,000

Total= Rs. 72,500

Step 2: Tax on net agricultural income + maximum exemption limit according to rates (Rs. 3,00,000 + Rs. 2,50,000= Rs. 5,50,000)

Tax on the first Rs. 2,50,000 = Nil

Tax @5% on the next Rs. 2,50,000 = Rs. 12,500

Tax @10% on balance Rs. 50,000 = Rs. 10,000

Total= Rs.22,500

Step 3: Final tax= Rs. 72,500 – Rs. 22,500= Rs.50,000

(+) Health and Education cess @ 4% = Rs. 2000

Total tax liability= Rs. 52,000


Capital Gain on Sale of Agricultural Land

A taxpayer who sells his agricultural land and uses the earnings to buy another agricultural land is eligible for capital gains relief under Section 54-B. The following requirements must be met in order to receive the benefit under Section 54B: 

  • The person being assessed must be an individual or HUF.

  • Agricultural land, whether it be a short-term or long-term capital asset, should be transferred as an asset. (It is crucial to understand that rural agricultural land is free from capital gains taxes since it is not a capital asset.) 

  • The taxpayer must purchase another agricultural plot within two years of the date of the land transfer.

  • Before the date of land transfer, the individual, his parents, or any HUF member must have utilised the agricultural land for agricultural purposes for a minimum of two years.


Section 10(37) states that, in the case of an individual or HUF, no capital gain would be subject to tax if the agricultural land was acquired through compulsory means in accordance with a statute whose consideration was approved by the Central Government or RBI and received on or after April 1, 2004. 

The following two options will determine the exemption amount under Section 54B: 

  • Amount of capital gains from the sale of agricultural land

  • The sum placed in the Capital Gains Deposit Account Scheme; or the amount invested in new agricultural land


Conclusion

Do you have questions regarding how agricultural revenue is treated and taxed? To properly manage your taxes, you should see an expert if you have any queries regarding the exemption limit, tax calculations, or reporting agricultural revenue in your ITR submission. This article provides clarification on your actual tax liability on the profits from your agricultural land and the capital gains benefits of owning agricultural land.


FAQ

Q1. How much agricultural income is tax-free?

Income from agriculture is not subject to taxes. State governments may levy an agriculture tax, although profits from farming up to Rs. 5,000 are exempt from taxation.


Q2. What is partly agricultural income?

When an assessee grows agricultural items and uses them as raw materials for product production, they are earning partial agricultural income. In this case, revenue from product sales is split between non-agricultural and agricultural sources.


Q3. What if agricultural activities are carried out on urban land?

Income from agriculture produced on urban land is subject to the same taxation provisions.


Q4. What is Section 54B of the Income Tax Act?

An individual or HUF may be qualified for an agricultural tax exemption under Section 54B if they sell land used for urban agriculture and purchase land used for urban or rural agriculture within two years of the date of transfer. The lesser of the capital gain and the amount invested in purchasing additional agricultural land would be exempt.


Q5. Which ITR to file for agricultural income?

In ITR 1, the agricultural income column is where it should be displayed. However, ITR 1 is only applicable up to a Rs 5,000 agricultural income. If it goes beyond the Rs. 5,000 cap, an ITR 2 form needs to be submitted.


Q6. I have a business income of Rs 1.8 lakh and an agricultural income of Rs 7.5 lakh. Do I have to file an ITR?

The assessee's non-agricultural income must exceed the basic exemption limit for agricultural income to be subject to taxes. The business's revenue in this instance is less than the basic exemption amount. Nonetheless, in order to reveal the excluded agricultural income, you must file the returns.


Q7. I have income from both industry and farming. Can I get any tax exemption?

If your agricultural income meets all the requirements, it will be exempt. However, your agricultural revenue will be taken into account when determining the applicable tax rate in order to determine non-agricultural income.


Q8. What are the Union Budget 2023-24’s highlights related to the agricultural sector?

The following issues about the agriculture sector were emphasised in the Union Budget 2023–24: 

  • About Rs. 1.25 lakh crore has been allotted to the Ministry of Agriculture and Farmers Welfare, which also includes Agricultural Education and Research. 

  • The establishment of an Agriculture Accelerator Fund, which aims to support companies run by young entrepreneurs in rural areas, is a noteworthy milestone for the agricultural sector.







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