Tax on Agricultural Income

Agricultural income earned in India is considered as exempt as per Section 10(1) of the Income Tax Act. However, agricultural income from outside India is rendered taxable. In this article, we review the nuances of tax on agricultural income in India.

Types of Agricultural Income

Agricultural Income is defined in three parts under the Income Tax Act Sec.2(1A) as follows. The type and category of the agricultural income determine the tax codes applicable.

Rental Income from Agricultural Land

If any person has rented out agricultural land, the rent received will be considered as agricultural income. In such cases, the rent received will be tax-exempt and considered to be agricultural income. However, if the amount of rent payable to the landlord was in arrears and the landlord collected interest on the arrears, then in such a case, the interest portion will not be considered agricultural income. Interest earned on arrears on rental income from agricultural land will be considered only as interest income and is taxable.

Income from Agricultural Operations

Income earned from agricultural operations is termed as agricultural income and is exempt from income tax. Further, companies engaged in agricultural operations also enjoy income tax exemption, if the income earned is purely agricultural income, as per the Income Tax Act. Dividends distributed to shareholders by agricultural companies are however not considered to be the agricultural income of the shareholder. Hence, to a certain extent, it will be considered to be his/her dividend income and is taxable. But, if such dividend has been received from a domestic company, it shall be exempt u/s 10(34) and the domestic company will have to pay additional Income-Tax. If the foreign company is conducting agricultural operations in India, its income will also be exempt and if the foreign company has distributed dividend, such dividends will be taxable in the hands of shareholders but the foreign company shall be exempt from Additional Income-Tax. If any partnership firm is involved in agricultural activity, its income will also be considered to be agricultural income and will also exempt from Income-Tax. If such a partnership firm distributed profits to the partners, the profit share received by a partner will be exempt from Income-Tax u/s 10(2A) or it can be considered to be agricultural income u/s 10(1). If any partnership firm is occupied in non-agricultural activities and has paid salary or interest to the partners, the relevant salary or interest is taxable in the hands of the partnership.

Farm Building Income

The farm building is any building in the agricultural field or is very close to the agricultural field and it is utilized for storing agricultural produce or agricultural implements or it is being utilized by the farmer as a dwelling unit. Income from a farm building is called farm building income and tax is computed as per provision of house property - considered to be Agricultural Income. Additional conditions for classification as farm building income include that the building be in a rural area and if it in the urban area it must be constructed on the land which has been classified as agricultural land.

Partial Integration Method

If a person earns both agricultural and non-agricultural income, then the taxable income is calculated as per the partial integration method. The steps for computing taxable income as per partial integration method is as follows:

Compute income tax on the basis of the total of agricultural income + non-agricultural income without education cess.
Compute income tax on the basis total of agricultural income in addition to exemption limit (Rs.2.5 lakhs currently) without education cess.
Deduct tax at step (2) from tax at step (1) and apply education cess of 3%.

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