Updated on: December 23rd, 2024 10:47 AM

Agricultural Income in Income Tax

Agricultural income plays a significant role in India’s economy, especially in rural areas where farming is the primary occupation. The Indian government provides certain exemptions and reliefs for agricultural income under the Income Tax Act, recognising its importance and supporting the livelihood of farmers. While agricultural income is generally exempt from income tax, there are specific provisions and conditions outlined in the Act that determine how it is treated for tax purposes. Understanding these rules is essential for anyone involved in agriculture to ensure compliance and take advantage of the available tax benefits. In this article, we will explore agricultural income in the context of income tax in detail, helping you understand how it is treated, its exemptions, and the necessary compliance measures.

What is Agricultural Income in Income Tax?

Agricultural income refers to the earnings or revenue derived primarily from agricultural activities conducted on designated agricultural land. These activities encompass cultivating crops, utilizing buildings on agricultural land, and harvesting commercial produce from horticultural land. Agricultural income is considered distinct from other forms of income, and certain provisions under the Income Tax Act provide specific exemptions and benefits for this type of income.

Examples of Agricultural Income

Agricultural income includes the following sources of revenue:

• Rent or Revenue from Agricultural Land: Any rent or revenue derived from land located in India that is used for agricultural purposes is considered agricultural income. This could include income from leasing agricultural land.
• Revenue from Agricultural Goods Requiring Processing: Agricultural income also includes revenue generated from the production of agricultural goods that require processing before they can be sold. For example, crops like oats need husking before being marketed.
• Income from Cultivating and Selling Agricultural Produce: Earnings from cultivating and selling crops directly from agricultural land are classified as agricultural income. For instance, income from selling tomatoes grown on agricultural land is considered agricultural income.
• Income from a Farmhouse: Income derived from a farmhouse is considered agricultural income, provided certain conditions are met under Section 2(1A) of the Income Tax Act. To qualify for the exemption, the farmhouse must be located on or near agricultural land, and the agricultural land should not fall within a specified proximity to a municipality based on population thresholds:
  • Within 2 km: Population between 10,000 and 1,00,000
  • Within 6 km: Population between 1,00,000 and 10,00,000
  • Within 8 km: Population exceeding 10,00,000
• Income from Saplings and Seedlings in a Nursery: Any income generated from growing saplings or seedlings in a nursery is also considered agricultural income.

These examples illustrate the various forms of income that are categorized under agricultural income, all of which benefit from the tax exemptions and reliefs provided by the government under the Income Tax Act.

Examples of Agricultural Income

Agricultural income is derived directly from activities related to the cultivation of land or agricultural operations. Some common examples include:

• Income from the sale of seeds: Earnings from selling seeds used for agricultural cultivation.
• Income from the sale of replanted trees: Profits from selling trees that have been planted or replanted for agricultural purposes.
• Interest on capital received by a partner from a firm engaged in agricultural operations: Income earned by a partner from a firm conducting agricultural activities.
• Income from growing flowers and creepers: Profits from cultivating flowers and creepers as part of agricultural practices.
• Rent received for agricultural land: Earnings from leasing out agricultural land.
• Profits received by a partner from a firm involved in agrarian production or activities: Income received by a partner from a business involved in agricultural production or activities.
• Income from growing bamboo: Earnings from cultivating and selling bamboo, which is considered part of agriculture.

Income Not Considered Agricultural Income in Income Tax

While agricultural income enjoys certain exemptions and tax benefits, there are several types of income that do not qualify as agricultural income under the Income Tax Act. Below are the key categories of income that are not considered agricultural income:

• Income from Dairy Farming, Poultry, and Livestock Rearing: Income derived from activities like dairy farming, poultry farming, or rearing livestock is not considered agricultural income. Although these activities are related to agriculture, they are classified as non-agricultural income since they do not involve the cultivation of land.
• Income from the Sale of Timber or Forest Produce: The income generated from cutting and selling timber or forest trees is not considered agricultural income. This is because the sale of timber generally does not involve the process of cultivating or growing the trees but rather the extraction of naturally grown trees.
• Income from Agricultural Land Held as Stock-in-Trade: If agricultural land is held as stock-in-trade (i.e., the intention is to sell it for profit rather than for agricultural use), the income derived from selling such land is not considered agricultural income. This applies to the sale of land where the objective is commercial rather than agricultural.
• Income from Agricultural Land Located Near Urban Areas: Income derived from agricultural land located near urban areas may not be considered agricultural income. If the land is situated within a certain distance from a municipality (e.g., within 2, 6, or 8 kilometres, depending on the population of the area), the income may be classified as non-agricultural income, as defined by the Income Tax Act.
• Income from Services Not Directly Related to Agriculture: Any income generated from services or activities not directly related to the cultivation of land, such as providing consultancy, selling farming tools, or renting agricultural machinery, is not considered agricultural income. These activities are viewed as business income rather than agricultural income.
• Income from Renting Out Land for Non-Agricultural Purposes: Income from renting out agricultural land for non-agricultural purposes, such as constructing a building or setting up a commercial enterprise, is not considered agricultural income. The income is considered rental income from a property and is taxable under the provisions for property income.
• Income from Mining, Quarrying, or Industrial Activities: Any income generated from industrial or mining activities on agricultural lands, such as extracting minerals, quarrying stones, or setting up factories, is not considered agricultural income. These activities do not fall within the scope of agricultural operations and are treated as non-agricultural income.
• Income from the Sale of Land (Except Agricultural Land): The sale of non-agricultural land (e.g., urban or commercial land) is not classified as agricultural income. Such income is treated as capital gains and is taxable under the relevant provisions of the Income Tax Act.

Taxability of Agricultural Income in India

In India, agricultural income is treated differently from other types of income for tax purposes. According to the Income Tax Act, agricultural income is exempt from income tax and is not included in the total income when calculating tax liability. However, the Income Tax Act indirectly taxes agricultural income through a process known as partial integration. Under this method, agricultural income is taken into account while calculating the tax on non-agricultural income, which results in non-agricultural income being taxed at higher rates.

Applicability

This method applies to the following entities:

• Hindu Undivided Families (HUFs)
• Associations of Persons (AOP)
• Bodies of Individuals (BOI)
• Artificial juridical persons

It does not apply to:

• Companies
• Limited Liability Partnerships (LLPs)
• Cooperative societies
• Local authorities

Conditions for Partial Integration

The partial integration method is applicable when the following conditions are met:

• Net agricultural income exceeds ₹5,000 in the financial year.
• Non-agricultural income exceeds the basic exemption limit as per the following thresholds:
  • Individuals below 60 years (Old Regime): Income greater than ₹2.5 lakh.
  • Individuals between 60 and 80 years (Old Regime): Income greater than ₹3 lakh.
  • Individuals above 80 years (Old Regime): Income greater than ₹5 lakh.
  • All individuals (New Regime): Income greater than ₹3 lakh.

In simple terms, if both the agricultural income exceeds ₹5,000 and non-agricultural income exceeds the exemption limit, the tax on non-agricultural income is calculated at higher rates using the agricultural income for determining the tax slab.

Which ITR to File for Agricultural Income?

Agricultural income must be reported under the "Agricultural Income" section in the Income Tax Return (ITR) forms.

• ITR-1: This form can be filed if the agricultural income is ₹5,000 or less. It is applicable to individuals whose total income includes basic salary, pension, and income from one house property, along with agricultural income not exceeding ₹5,000.
• ITR-2: If the agricultural income exceeds ₹5,000, then ITR-2 must be filed. This form is required for individuals who have income from more than one source, including agricultural income over ₹5,000.

How to Show Agricultural Income in ITR 1

When filing ITR-1 (Sahaj), agricultural income is reported in the Agricultural Income section of the form. However, it is important to note that ITR-1 can only be used if the total agricultural income does not exceed Rs. 5,000. If the agricultural income exceeds this threshold, you will need to file ITR-2 instead.

Tax Exemption and Calculation for Agricultural Income under the Income Tax Act

Agricultural income is generally exempt from income tax under certain conditions. Here are the key cases where agricultural income enjoys a complete tax rebate:

• If your total agricultural income is less than ₹5,000 per year.
• If the income from agricultural land is your only source of income, meaning you have no other sources of income.
• If you have both agricultural and other income, and the total income, excluding agricultural income, is less than the basic exemption limit.

However, if your agricultural income exceeds ₹5,000 and you have other sources of income, the tax liability for that year is calculated as follows: applicable to individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and Artificial Judicial Persons:

• Compute income tax on the aggregate income(i.e., agricultural income + other income) as per the prevailing income tax rates (excluding surcharge and cess).
• Compute income tax on the sum of the basic exemption limit plus agricultural income as per the prevailing income tax rates (excluding surcharge and cess).
• Subtract the second amount from the first to determine the tax liability for the year. Afterwards, add any applicable surcharge and cess.

This process ensures that agricultural income is indirectly taxed when it exceeds the threshold and is combined with other taxable income.

Tax Benefit Under Section 54B

Section 54B provides capital gains tax relief to taxpayers who sell agricultural land and use the sale proceeds to acquire another agricultural land. To qualify for this benefit, the following conditions must be met:

• The taxpayer must be an individual or a Hindu Undivided Family (HUF).
• The transferred asset must be agricultural land, which can either be a long-term or short-term capital asset.
• The agricultural land should have been used for agricultural purposes for at least two years immediately before the transfer.
• The taxpayer must purchase or acquire another agricultural land within two years from the date of transfer.

The exemption under Section 54B is limited to the lower of the following amounts:

• The capital gains arise from the sale of agricultural land.
• The investment in the new agricultural land, or the amount deposited in the Capital Gains Deposit Account Scheme.

This provision offers taxpayers the opportunity to reinvest their capital gains in agricultural land and potentially reduce their tax liability.

Additional Points to Consider for Agricultural Income

Here are some key aspects of agricultural income and its tax treatment:

1. Qualifying for Tax-Exempt Income

• Land Use: To qualify for tax-exempt income, the land must be used for agricultural purposes, which includes cultivating crops, fruits, vegetables, and other land-based products. However, activities such as raising livestock, poultry farming, or fish farming are generally not considered agricultural operations for tax purposes.
• Ownership: To earn tax-free income from rent or revenue, the taxpayer must have an interest in the land, either as an owner or mortgagee. For income derived from agricultural operations, the cultivator(even if they are a tenant or sub-tenant) can qualify for tax benefits, as ownership of the land is not a requirement.

2. Special Cases

• Carry-Forward Losses: Losses incurred from agricultural operations can be carried forward for up to eight years and used to offset future agricultural income. This allows taxpayers to reduce their taxable agricultural income in future years if they face losses.
• Income from Trees: Income from cutting and selling timber trees is not considered agricultural income. Since timber trees do not involve cultivation or harvesting in the traditional sense of agricultural practices, the income generated from their sale is not eligible for tax exemption.
• Plantation Crops: Income from certain plantation crops, such as rubber, tea, and coffee, is subject to special tax treatment. The production of these crops involves both agricultural and non-agricultural activities, so the income is split. Only the agricultural portion of the income is tax-exempt, while the non-agricultural portion is subject to tax.

These points help clarify the specific rules and exceptions related to agricultural income and its taxation under the Income Tax Act.

Treatment of Agricultural Land in Capital Gains

Under Section 54B of the Income Tax Act, taxpayers can avail relief from capital gains when they sell their agricultural land and use the sale proceeds to acquire another agricultural land. The conditions for claiming the benefit under Section 54B are as follows:

• Eligible Assessee: The taxpayer must be an individual or a Hindu Undivided Family (HUF).
• Asset Transferred: The asset being transferred must be agricultural land, whether it is classified as a long-term capital asset or a short-term capital asset. It is important to note that rural agricultural land is not considered a capital asset and, therefore, exempt from capital gains.
• Use of Agricultural Land: The agricultural land should have been used by the taxpayer, their parents, or any member of the HUF for agricultural purposes for at least two years immediately preceding the date of transfer.
• Purchase of New Agricultural Land: The taxpayer must acquire another agricultural land within two years from the date of transferring the original land.

Additional Relief under Section 10(37)

As per Section 10(37) of the Income Tax Act, no capital gains would be charged if the agricultural land is compulsorily acquired under any law, provided the consideration for the acquisition is approved by the Central Government or RBI and the consideration is received on or after April 1, 2004.

Agriculture Income Tax Exemption Limit under Section 54B

Under Section 54B of the Income Tax Act, a taxpayer can claim exemption from capital gains tax when they sell agricultural land and use the sale proceeds to purchase another agricultural land. The amount of exemption under Section 54B will be the lower of the following two amounts:

• The capital gains arise from the transfer of agricultural land.
• The investment made in the new agricultural land or the amount deposited in the Capital Gains Deposit Account Scheme.

Example: Suppose you sold agricultural land in April 2019 for Rs. 25,20,000, and the long-term capital gain arising from the sale of the land was Rs. 8,40,000. In December 2019, you purchased another agricultural land worth Rs. 5,00,000. The agricultural income tax calculation for Assessment Year 2019-20 would be as follows:

Particulars	Amount (In Rs.)
Long-term capital gain arising on transfer of old land	8,40,000
Less: Exemption under section 54B (*)	5,00,000
Taxable Long-Term Capital Gains	3,40,000

(*) The exemption under Section 54B is the lower of:

• Capital gains arising on the transfer of agricultural land (Rs. 8,40,000), or
• Investment in the new agricultural land (Rs. 5,00,000).

Therefore, the exemption claimed is Rs. 5,00,000, and the taxable capital gain is Rs. 3,40,000.

Important Note:

• If a taxpayer buys new agricultural land solely to claim the exemption under Section 54Band then transfers the new land within 3 years of its acquisition, the benefit under Section 54B will be withdrawn. In such cases, the capital gains tax will be re-applied as if the exemption was never granted.

Latest Updates

Union Budget Highlights for 2023-24: Agricultural Sector

The Union Budget 2023-24 included several key provisions aimed at boosting the agricultural sector:

• Allocation for Agriculture and Farmers Welfare: The Ministry of Agriculture and Farmers Welfare, including Agricultural Education and Research, has been allocated approximately ₹1.25 lakh crore to support various initiatives and developments within the sector.
• Agriculture Accelerator Fund: A notable development is the establishment of an Agriculture Accelerator Fund, which aims to promote startups led by young entrepreneurs in rural areas. This fund is designed to encourage innovation and provide financial support to initiatives that can drive growth and modernization in agriculture.

Conclusion

In conclusion, while agricultural income in India is largely exempt from income tax, it is important to understand the nuances of the Income Tax Act regarding exemptions, partial integration with non-agricultural income, and the treatment of agricultural land for capital gains. Farmers and landowners must carefully follow the prescribed guidelines to ensure accurate reporting and claim any applicable exemptions. By staying informed about agricultural income taxation, individuals can make the most of the available tax benefits and avoid potential issues during income tax filing. Are you ready to file your Agricultural Income ITR? Ensure your tax filing is accurate and compliant with the latest regulations. IndiaFilings can help you navigate the complexities of agricultural income tax exemptions and deductions. Get expert assistance and file your returns seamlessly today. Contact IndiaFilings now for personalized support and timely filing!