Agriculture is one of the significant economic activities in India. Agricultural income is of equal significance; therefore, it has a special tax status under Indian tax laws. This blog discusses what agricultural income entails, how it will be treated as far as tax is concerned, its applicability to the Income Tax Act, and some of the provisions you need to know.
What is Agriculture Income?
As per Section 2(1A) of the Income-tax Act, 1961, agricultural income is an income earned due to:
- Land within India serves for agricultural purposes.
- Agricultural or other labor, as plowing, hoeing, or harvesting.
- Preservation of agricultural produce in a saleable form.
- Also, other sources of agricultural income may be:
- Income or lease of farmland.
- Revenues of agriculturally based farmhouses.
- Revenue generation from saplings and nursery operations.
Taxation of Agricultural Income
Section 10(1), fully exempt
The income from agricultural activity is exempt from tax under Section 10(1) of the Income Tax Act. This implies that, when you receive entirely agricultural income, this does not attract any tax.
The rationale of this tax exemption comes from the principle of constitutional allocation. Agricultural gains are on the state list according to the Indian Constitution, and as such, the central government is not able to impose a tax on agricultural gains directly.
Partial Integration of Taxpayers’ Income of Non-Agricultural Nature
Where an income earner earns both agricultural and non-agricultural income, the farm income remains exempt; however, they are treated in part at rates termed as partial integration.
This applies in case:
- Net agricultural income is more than Rs. 5000 and
- The basic tax-free threshold is lower than the total income (including agricultural income).
In the mentioned case, tax is calculated as follows:
- Calculate tax based on the agricultural income and non-agricultural income together.
- Calculate the tax on the amount of the agricultural income plus the basic exemption limit.
The difference between the two will be your tax liability.
Examples of Agricultural Income
Income, which is deemed to be agricultural income, is outlined as follows:
- The income or payments made as compensation for land used in farming.
- The revenues that a farmer gains through selling farm products that he/she generates on the farm.
- Profits made by tilling, sowing, harvesting and marketing crops.
Examples of Non-Agricultural Income
The Income Tax law has certain exceptions. Tasks like:
- Earnings derived through dairy farming, poultry or fishery.
- Without engaging in agricultural activity, one will be able to trade agricultural produce.
- Recent processing of the agricultural produce, without their agricultural land.
These incomes are taxed as business income and are subject to normal tax rates.
State Governments’ Taxation of Agricultural Income
Although the central government is not allowed to tax agricultural income, state governments are permitted to impose taxes on agricultural income in accordance with their state laws governing agrarian income tax. But the states in India, as a majority, do not tax agricultural income.
Records and Reporting of Agriculture Income
It is desirable to do so when you are getting both farming and non-farm income, a part of which may be taxable income.
Record agricultural income in your Income Tax Return in the section of Exempt Income. Correct recording will assist you in proving the exemption status in case of interrogation by the tax departments.
Key Points
- Fully exempted under section 10(1) in case agricultural income is the only source of income.
- Partially integrable when combined with non-agricultural income that is above the basic exemption level.
- Other activities, such as the processing of agricultural produce grown by you, may be exempt.
- Such income as trading in agricultural products or running a commercial nursery is not exempt.
Conclusion
The Indian tax laws provide a unique section for agricultural income wherein no taxes are imposed on it. Yet, it should be clarified that the definition and scope of agricultural income need to be made clear. In case you are also engaged in sources of non-agricultural income, it is always possible to be affected by partial integration in terms of paying tax and hence this should be taken into consideration during tax computation.
With knowledge of these provisions, you are able to make effective planning of your taxes, enjoy various tax exemptions that are applicable, and also be tax compliant without straining.
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