Agricultural Income – Tax treatment / Taxability

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Last Updated on July 5, 2020 by Kanakkupillai

What is Agricultural Income – Tax treatment / Taxability

 
According to Section 10 (1) of the Income Tax Act, Agricultural income is not taxable as it is not considered as an individual’s total income in India. However, as per the state government, agricultural income will come under taxable, if the amount exceeds Rs.5,000 per year. In India, agricultural income is classified as a valid source of income and generally includes financial gain from agricultural sources which comprise buildings on an agricultural land or related to an agricultural land, and commercial products produced or manufactured from an agricultural land. This type of income is counted for rate purposes when calculating the income tax liability of a person.
In India, agricultural income refers to income earned or revenue derived from sources that include farming land, buildings on or identified with an agricultural land and commercial produce from a horticultural land. Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961.

 What is Agricultural Income in India?

Section 2 (1A) of the Income tax Act details out the conditions wherein sources can be considered to be generating agricultural income. The section’s definitions basically point out the following as the sources for agricultural income –
According to Section 10(1) of the Income Tax Act, agricultural income is not considered a means of income. Income generated from agriculture is exempted from taxation by the Central Government

  • Revenue generated through rent or lease of a land in India that is used for agricultural purposes
  • Revenue generated through the commercial sale of produce gained from an agricultural land
  • Revenue generated through the renting or leasing of buildings in and around the agricultural land subject to the following conditions–
  1. The cultivator or farmer should have occupied the building, either through rent or revenue
  2. The building is used as a residential place, storeroom or outhouse
  3. The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed

Below are the key points to remember while counted that whether an income is actually a valid agricultural income –

  • Financial gain should be from an existing piece of land
  • Financial gain should be from a piece of land which is used for agricultural operations
  • Financial gain should be the produce cultivated from the agricultural land
  • Financial gain can be from a land that is not under the individual’s ownership

What is not counted as Agricultural Income in India?

Following is the list of exclusions of income which is yielded by doing agriculture work, but they are considered as “non-agriculture income”. They are as follows-:

  • Income from the sale of processed products of agricultural nature without the activities of actual agricultural purpose.
  • Income from extremely processed items.
  • Income from trees that have been traded as timber.
  • Income from farming, such as poultry.
  • Income from sale of spontaneously got from trees.
  • Income from dairy farming.
  • Income from bee hiving.
  • Income by purchasing the standing crop.
  • Dividend amount paid by a company out of its agricultural income.

 
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Is Agricultural Income Taxed In India?

The income obtained from agricultural land is nontaxable under Section 10(1) of the Income Tax Act 1961.

  • Agricultural income is calculated in the same way as Business income.
  • If an individual suffers from losses in agriculture then these losses can be taken off against the agricultural gains for the next 8 years.
  • If an individual’s total income is earned only from agriculture then that particular income completely comes under tax exemption. For instance, if you earn 4 Lakhs from agriculture yearly, then your income is fully tax exempt and there is no need to file Income tax returns for that particular income.
  • If an individual has agricultural income other than their other sources of income then you are liable to pay income tax on your other sources of income apart from agriculture income.

Basically, agricultural income is not included under total income and is freed from taxation. The Central Government can’t levy tax or impose tax on agricultural income. The exemption clause of agriculture income is mentioned under Section 10 (1) of the Income Tax Act of India.
As per the latest amendment, if the income from agriculture is within Rs. 5000 in a financial year, then that income will not be considered for tax purposes. Anything that exceeds more than Rs. 5000 will be considered as taxable as per the applicable rates. Hence, state governments can charge agricultural tax for agriculture income that exceeds Rs.5000.  According to the finance act, the total tax liability for an individual would include the agriculture income added under the non-agricultural category.
Though agriculture income is exempted from tax under Section 10 (1), tax on agricultural income still remains in the state government level if the mentioned agriculture income crosses Rs.5000 per year and if the total income except agricultural income is more than the basic tax exemption limit. In the case of salaried individuals, the tax they need to pay might increase because of their aggregation of income. And in the case of business firms, companies and non-individuals, it is easy and simple to pay the associated tax as the tax is imposed on the chargeable income are usually at a flat rate. 

How to calculate the Tax taking Agricultural Income into account:

In case, the agricultural land does not come under the range of the aforementioned section then the individual or the owner of the land would need to do evaluate separately, just for the tax purpose. If the agricultural income falls under the aforementioned section, i.e. within INR 5000, then the person or the owner have to file the returns through ITR 1 , else ITR 2 to be used in which there is a separate column to declare the details of the agriculture income.
As per Section 2 (1A) in the ITA, agricultural income means any rent or revenue derived from land located in India, including rent on agricultural land and buildings, and is tax-exempt. Under contract farming, a farmer could undertake many of these operations and qualify for income tax exemption.
As per the fact that the income from agricultural sources is coming under Section 2 (1A) of the IT Act, the tax calculation for the agricultural income in income tax is done using the following steps. 

  • Considering the Agricultural Income – Thinking X is the base income of a person and consider Y as his agricultural income, firstly, the tax needs to be calculated on the total amount of income, i.e. X+Y. Let’s name this tax as T(X+Y)
  • Including the basic tax slab benefit – Hinging upon the changes in the Income Tax rules, there might be change in basic tax slab, but for calculation sake, let’s consider the basic tax slab as S. That requires to be added to the income earned from and another tax is computed on the amount. Let’s name this tax as T(S+Y)
  • Now Income Tax liability – This is the final step in calculation of the tax and it is subjected to deductions. Therefore IT (Income Tax) = T(X+A) – T(S+Y)

One should always remember to aggregate the agricultural income while calculating tax since that can allow one to avoid unnecessary extra taxes or interest on taxes.
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