Agricultural income in India is a major source of the rural population. Moreover, agricultural income is the primary source of income in India. To promote agriculture, the Central Government of India has taken many measures and launched schemes, loan concessions, exemptions, and benefits to farmers. In line with other Central Government initiatives, the Income Tax Department provides tax exemption on agricultural income earned during the financial year. In this article, we have covered the meaning of agricultural income for tax purposes, tax treatment, capital gain on the sale of agricultural land.
What is Agricultural Income?
Section 2(1A) of the Income Tax Act, 1961 provides the meaning of the agricultural income for the purpose of taxation. The following types of income are included within the definition of agricultural income:
Rent or Revenue
Any rent or revenue received from the land. Such land is in India and is used for the purpose of agriculture. Rent from the land is a very common source of income. Rent is the compensation for a right to use the land. However, such revenue from the land does not include the income arising from the transfer or sale of such agricultural land. There must be a direct relationship between the rent or revenue and the land. Only then it will be treated as an agricultural income arising from an agricultural land for the purpose of taxation.
Income From Land
Any income arising from agricultural activities on the agricultural land
The Income Tax Act, 1961 does not provide a meaning of agricultural activities. However, the Supreme Court has laid down the guidelines for agricultural activity in the case CIT v. Raja Benoy Kumar Sahas Roy. The following are the two types of agricultural activities:
- The basic operations are the activities that require human skills on the land itself. Such activities include sowing of seeds, plantation, cultivation of plants, soiling, harvesting crops, tilling of the land, sowing of the seeds, planting.
- The subsequent activities are of two types of activities that are growth and preservation and making the agricultural produce fit for the market. The activities of growth and preservation are absolutely necessary for effectively raising the plant from the land such as weeding, seeding, digging soil around the produce, removal of undesirable under growths, and all operations which foster the growth and preserve the same not only from insects and pests. Other activities of making the agricultural produce a fit for the market include tending, pruning, cutting, storing, carrying to the market, etc. Any income received from saplings or seedlings grown in a nursery is also considered as an agricultural activity even if there is no basic operation carried out on the agricultural land.
Any income arising from the performance of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market.
The income that a cultivator earns through activities that make the produce a fit for the market. However, such activities must not change the core characteristics of the produce. For example- if the cultivator washes the potatoes grown and transfers them into a bag then these are activities to make the produce fit for the market. Moreover, these activities retain the originality of the produce. Let us take another example. If the cultivator produces potatoes and turns them into chips and packs to make them marketable then the entire originality of the produce changes.
Sale of Produce
Any income from the sale of the produce raised or received by a cultivator or receiver of rent-in-kind. Moreover, no process has been performed other than a process of agricultural nature
Income Earned From Building
Income earned from any building owned and occupied by the receiver of the rent. It includes revenue of any such land or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which or the produce of which, any agricultural process is carried out. Furthermore, the following conditions must be met to declare such income as agricultural income:
- The building is on or in the immediate vicinity of the agricultural land. The receiver or cultivator requires the building as a dwelling house, a storehouse, or other out-building.
- The agricultural land is under the assessment of land revenue. Otherwise, the land is subject to a local rate. Such a local rate is collected by officers of the Government of India.
- If, the land is neither under the assessment of land revenue nor it is subject to then the land must not be situated
- In an area that is under the jurisdiction of a municipality or a cantonment board with a population of not less than 10,000 residents
- In any area as per the following aerial distance and population
- A municipality means a municipal corporation, notified area committee, town area committee, town committee, or by any other name.
- If the land is situated within the municipality area boundaries then it is not considered as agricultural land. Hence, the income will be taxable.
- If the taxpayer uses the land or building for any purpose that is not an agricultural purpose then it is not an agricultural income. Such other purposes include renting for residential purposes or any business or professional purpose. The mere existence of agricultural land and a building in the vicinity of agricultural land is not a sufficient reason for an agricultural income. The activity must be of agricultural nature.
- The term “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
|Aerial Distance From Municipality||Population as per last preceding census|
|With 2 Km||10,000 to 1,00,000|
|With 6 Km||1,00,000 to 10,00,000|
|With 8 Km||More than 10,00,000|
Tax on Agricultural Income
Agricultural income is exempt from tax under section 10(1) of the Income Tax Act, 1961. However, the income tax is applicable through a partial integration of agricultural income with non-agricultural income earned during the financial year. The partial integration of agricultural income is applicable on fulfilment of the following conditions:
- The agricultural income is more than Rs 5000 for the financial year
- The taxpayer is an individual, Hindu undivided family HUF, an association of persons AOP, the body of individuals BOU, or an artificial judicial person.
- The total taxable non-agricultural income is more than the basic tax exemption limit. The basic tax exemption limit for an individual. HUF, AOP, BOI and Artificial Juridical Person is Rs 2,50,000. For a senior citizen, the basic tax exemption limit is Rs 3,00,000. For a super senior citizen, the basic tax exemption limit is Rs 5,00,000.
Agriculture Income Tax Calculation
|Calculate the Tax on Agricultural and Non-Agricultural Income (A)||XXX|
|Calculate the Tax on Non-Agricultural Income and basic Exemption Limit (B)||XXX|
|Net Tax Payable (A-B)||XXX|
|Minus: Tax Rebate||XXX|
|Total Tax Payable||XXX|
Illustration on Calculation of Agricultural Income
Mr. Arun, the resident individual, earns an agricultural income of Rs 1,50,000 and business income of Rs 6,00,000 during the financial year. Since the agricultural income is more than Rs 5000 it is subject to partial integration of agricultural income with non-agricultural income earned during the financial year.
Step 1 : Calculate the tax payable on Agricultural and Non-Agricultural Income
Mr. Arun is subject to a basic exemption limit of Rs 2,50,000 with a tax slab of individuals other than senior citizens. The total income is Rs 7,50,000 payable is Rs 62,500.
Step 2 : Calculate the tax payable on Non-Agricultural Income and basic Exemption Limit. The Non-Agricultural Income and basic Exemption Limit is Rs 4,00,000 (Rs 1,50,000 and Rs 2,50,000). Total tax payable is Rs 7,500 on Rs 4,00,000.
Step 3 : Net tax payable will be the difference between tax payable under step-1 and step-2. Net tax payable is Rs 55,000 (Rs 62,500 – Rs 7,500)
Things To Remember
To consider an income as agricultural income the taxpayer must remember the following points as well:
- There must exist an agricultural land
- The taxpayer must use the land for agricultural purposes, activities, or operations. Such agricultural operations refer to the efforts used to cause a crop to emerge from the ground. The term “agricultural income” refers to earnings from agricultural operations, which include processes that prepare products for market sale. Both rent or revenue from the agricultural land and income earned by the farmer or receiver from the sale of produce is exempt from tax. However, agricultural operations must be done on the land.
- For land to have been used for agricultural purposes, some level of cultivation is required. Agriculture encompasses all land-based products such as grains, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands, among others. Breeding cattle, aquaculture, dairy farming, and poultry farming on agricultural land, on the other hand, are not considered agricultural operations.
- To be eligible for tax-free income in the case of rent or revenue, the assessee must have an interest in the land (as an owner or a mortgagee). In the case of agricultural operations, however, the cultivator does not have to be the landowner. He might be a sub-tenant or a tenant. In other words, all landowners are agriculturists and are free from paying taxes. In some circumstances, further processing may be required to turn agricultural produce into a marketable commodity. Because the producer’s ultimate goal is to sell his products, the sales earnings are termed agricultural income
- The taxpayer can carry forward the loss from agricultural operations for eight years. The taxpayer can set off the agricultural loss with agricultural income.
- If a taxpayer sells processed produce without carrying out agricultural activities or processing operations then such income is not considered as agricultural income.
- A taxpayer can convert the agricultural produce such that the very nature of the produce changes. For example canning of fruits, ketchup from tomatoes, chips from potatoes. In such a case the entire income will not be treated as agricultural income. Moreover, the income will be proportioned to agricultural income and business income.
- Any income from cutting and selling timber trees is not regarded as agricultural income. This is because there are no agricultural activities like soiling, cultivating, or harvesting.
- The Income Tax Act, 1961 provides for special treatment of income from rubber, tea, coffee, etc. This is because these products require a different agricultural process involving agricultural activities as well as non-agricultural activities. Hence, the income from agricultural and other operations is bifurcated. The following are the tax treatment:
|Operation||Agricultural Income||Business Income|
|Growing & Manufacturing of tea||60%||40%|
|Growing & Manufacturing of rubber||65%||35%|
|Growing & Manufacturing of coffee||75%||25%|
|Growing & Manufacturing of coffee grown, cured, roasted, and grounded||60%||40%|
Sale of Agricultural Land
A taxpayer can sell the agricultural land during the financial year and face the following tax treatment on such a sale of land:
- The taxpayer may hold the agricultural land as a stock-in-trade. In such a case, the sale of agricultural land is taxable under the head business income.
- Agricultural land situated in any rural area in India is not considered a capital asset. Hence, a capital gain is not applicable on such a sale.
- If an urban agricultural land is sold then capital gain is attracted. However, section 54B provides for a tax exemption on such capital gain.
Capital Gain on Sale of Agricultural Land
Section 54B provides for relief from tax on capital gain on the sale of urban agricultural land if the taxpayer purchases another agricultural land. The taxpayer must fulfill the following conditions:
- The taxpayer is an individual or Hindu Undivided Family HUF.
- Taxpayer must be using such land for agricultural purposes. Moreover, the taxpayer or his/ her parents must have been using the land for agricultural purposes in at least two years immediately preceding the date on which the transfer of land took place.
- Land may be a short term or a long term capital asset.
- The land purchased must have been used for agricultural purposes in at least two years immediately preceding the date on which the land is being purchased.
- The entire amount of capital gain must be utilized to purchase the new agricultural land. The difference between the capital gains and the cost of new land will be taxable under the head capital gains
- The new land must not be sold within a period of three years from the date of acquisition.
- In case the taxpayer is unable to utilize the capital gains then he/ she may deposit such an amount in the Capital Gains Account Scheme (CGAS) of any specified bank. Hence, he/ she can avoid the taxability until the complete utilization of the capital gains.
Income Tax Return (ITR)
The taxpayer carrying on an agricultural business must file his/ her ITR under section 139 like other taxpayers. If the agricultural income is less than Rs 5000 then the taxpayer can file ITR 1. However, if it is more than Rs 5000 then the taxpayer must file ITR 2.
Frequently Asked Questions
Yes, growing tea is partially considered as an agricultural income. Hence, 40% of such income is taxable under the business income. The rest of the 60% is taxable as agricultural income and hence exempt from tax.
No, such agricultural income is not exempt. The agricultural land must be situated in India for a tax exemption.
An agricultural income of up to Rs 5,000 is completely tax free. Any income more than Rs 5000 is taxable as partial integration with non-agricultural income.
An income from agricultural operations is exempt from tax irrespective of the land being situated in a rural or urban area.
The interest collected on a Crop Loan cannot be claimed as an exemption by the loan provider. This is because the condition of ownership of land is not essential and holds true only if the assessee has an interest in the land. The loan provider may not have an interest in the land as he/ she would be providing a loan as an ordinary business. The farmer who receives the crop loan, on the other hand, can use the loan as a tax deduction when calculating his/ her tax liability.
Yes, agricultural income from the sale of rubber trees is exempt from tax. However, the taxpayer must satisfy the conditions for agricultural operations and the existence of agricultural land.
No, agricultural income is not taxable in India. An agricultural income of up to Rs 5,000 is completely tax free. Any income more than Rs 5000 is taxable as partial integration with non-agricultural income.