Taxation of Agricultural Income in India

Updated: 08-12-2023 10:39:11 AM

India’s agricultural industry employs a large proportion of the country’s workforce especially in the rural areas of the country. In order to promote the agricultural sector, the government provides various incentives including special tax rules for income from agriculture. 

How is Agricultural Income Taxed?

As mentioned earlier, the income from agricultural activities is exempted from income tax (i.e. no direct tax is applicable) under Section 10(1) of the Income Tax Act, 1961. However, the extant Income Tax Act has now laid down the methods of indirectly tax in agricultural income. This particular concept or method is known as the ‘partial integration of agricultural income with non-agricultural income’. This concept aims at taxing the non-agricultural income at higher rates of tax. This is applicable when the following conditions are fulfilled:

• Individuals, Hindu Undivided Families (HUFs), BOIs, AOPs, Artificial Juridical Persons, etc. have to calculate their taxable income by using this concept. 
• Non-individual tax assessees such as firms, LLPs, companies, co-operative societies, local authorities, etc. are not permitted to use this method of taxation.
• Net income from agriculture is above Rs. 5,000 during the year
• Non-agricultural income which is considered taxable is as follows:
• Above Rs. 2.50 lakh for individuals who are less than 60 years of age and for HUFs, BOIs, AOPs, etc. 
• Above Rs. 3 lakh for individuals who are between 60 to 80 years of age
• Above Rs. 5 lakh for those who are more than 80 years of age

To put it simply, the non-agricultural income must be more than the maximum amount which is not chargeable as per the income tax slab rates.

What Qualifies as Agricultural Income?

Section 2 (1A) of the Income Tax Act, 1961 considers three activities as the main source of agricultural income in India. These are:

1. Revenue or Rent Received from Let out Agricultural Land in India

Rent is payable to the owner of the land in lieu of use by another individual as agricultural land. In this case, while the owner of the land often does not participate directly in agricultural activities, the income derived through rent will be considered as agricultural income as long as the let out land is used to carry out agriculture.

2. Income Derived through use of Agricultural Land by Owner:

(a) Agriculture: The definition of the agriculture, although not covered in the Income Tax Act, 1961 has been laid down by the Supreme Court of India in the case CIT vs. Raja Benoy Kumar Sahas Roy. Under this definition, agriculture activities in India are broadly classified under two heads – basic operations and subsequent operations. Key details of these types are as follows:

• Basic Operations: This would include land cultivation and consequent tilling of the agricultural land, seeds sowing, planting and other related operations that need human skills and efforts to be directly applied on the land itself.
• Subsequent Operations: This includes operations that are carried out with respect to harvesting, preservation and ensuring growth of the produce through allied agricultural activities such as weeding, tilling, irrigation, pruning, etc. Income generated from seeding or sapling grown in the nurseries is also considered as agricultural income irrespective of whether these basic operations of agriculture were carried out on the agricultural land or not.
  
  (b) Through performance of the process by the cultivators or the receivers of the rent in any kind that result in the agricultural produce being fit to be sold in the market:
• These processes include mechanical or manual operations that are employed to make the production market fit and the actual character of those produce is retained.
  
  (c) Income through the sale of marketable agricultural produce
• The income received on the sale would normally be partially agricultural income that is exempted and a part of it will be taxable non-agricultural income for any produce that does not undergo any ordinary process to become marketable. The Income Tax Act has rules to make this bifurcation about non-agricultural and cultural produce for products such as rubber, tea, coffee, etc.

3. Agricultural Income Derived from the Farm Building Needed for Various Agricultural Operations

The conditions for categorizing the income derived from farm building as agricultural income are as listed here:

1. The farm building must be in or on immediate vicinity of the agricultural land. It must be one which the revenue or receivers of rent or the cultivators by reason of their connection with the land, needs the building as a storehouse, house to stay or uses it for any other similar situations.
2. Any of the following conditions must be satisfied – 

• The agricultural land is assessed by either the land revenue or the local rates calculated and collected by any concerned government officers 

OR 

• The land must be situated within any of the following regions –

Aerial Distance from the Municipality	Population as per the Previous Census
Within 2 kilometres	10,000 to 1 lakh
Within 6 kilometres	1 lakh to 10 lakh
Within 8 kilometres	More than 10 lakh

Please note down that even when the population is less than 10,000, the agricultural land must be located within the local municipality’s jurisdiction or the cantonment board. In case the activities only have some distant relation to the land such as breeding, dairy farming, poultry farming, rearing of livestock, etc., they do not form any part of the agriculture income.

Examples of Agricultural and Non-Agricultural Income 

The following are some of the key examples of agricultural and non-agricultural income: 

Examples of Agricultural Income	Examples of Non-Agricultural Income
Income by selling seeds and saplings	Income from bee-keeping/dairy/poultry farming
Income from rent received from agricultural land	Income from selling purchased standing crop
Income received by growing flowers/creepers	Profits from butter/cheese making
Profits from agricultural activities	Income from salt extracted from sea water
Profits from sale of agricultural produce	Royalty received from mines

Calculation of Agricultural Income

The following is a schematic of how you can calculate your tax liability in case of agricultural and non-agricultural income: 

Income Head	Amount
Net Agricultural Income	X
Non-Agricultural Income	Y
Maximum Exemption Limit	Z
Taxable Income (A)	X+Y (as per income tax slab rate)
Taxable Income (B)	X+Z (as per income tax slab rate)
Actual Income Tax Liability	A-B