Applicability of Income Tax on Agricultural Income

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Applicability of Income Tax on Agricultural Income

Agriculture is supposed to be India’s principal employment. It is sometimes the only source of income for India’s massive rural population. The country as a whole is completely reliant on agriculture for its fundamental food needs. The government has a plethora of plans, laws, and other measures in place to support growth in this industry, one of which is an exemption from income tax.

According to Section 10(1), any income obtained from agricultural land is not included in Total Taxable Income.

Table of Content

What is Agricultural Income?

Agricultural income is defined in Section 2(1A) of the Income Tax Act as follows:

  • Any rent or revenue obtained from land in India that is used for agricultural purposes.
  • Any revenue received from such land via agricultural activities, including the processing of agricultural output to make it marketable or the sale of such products.
  • Any income attributable to a farm home, subject to the fulfilment of the requirements mentioned in section 2 in this respect (1A). Furthermore, any money received from saplings or seedlings cultivated in a nursery are considered agricultural income.

Tax Exemption on Agricultural Income

In certain circumstances, there is a total tax rebate on agricultural income.

  • If your overall agricultural revenue does not exceed Rs. 5,000;
  • If the revenue from agricultural land is your sole source of income, i.e. you have no other sources of income;
  • If you have both agricultural and non-agricultural income and your total income excluding such agricultural revenue is less than the basic exemption level.
  • However, if your agricultural income exceeds Rs. 5,000 and you have other sources of income, your tax burden for that year must be assessed as follows:
  • Calculate income tax on the aggregate income (agricultural income plus other income) using the current income tax rates.
  • Calculate income tax on the total of the basic exemption limit + agricultural income using the current income tax rates.
  • Now, Calculate (1) – (2) to determine the tax obligation for the

Tax Calculation Taking Agricultural Income into Consideration

If the agricultural land does not come within the scope of the aforementioned clause, a separate tax appraisal would be required. If the agricultural revenue is less than INR 5000, the returns must be submitted using ITR 1, otherwise, ITR 2 must be utilised, which has a separate column for stating the specifics of the income.

The tax computation here is based on the fact that income from agricultural sources falls under Section 2 (1A) of the IT Act.

The tax computation will comprise the following stages for all other regular purposes:

  • Including Agricultural Income – Since B is the individual’s base revenue and A represents agricultural income, the tax must first be calculated on the sum of B+A. Let us call this a tax.
  • Including the basic tax slab advantage – The basic tax slab may change depending on changes in the Income Tax regulations, but for clarity’s sake, let’s regard it as S. This must be added to agricultural income, and a new tax must be determined on the amount. Let us refer to this tax as T(S+A).
  • Income Tax Liability – This is the tax that is deductible. As a result, IT = T(B+A) – T(S+A).

Capital Gain Treatment of Agricultural Land

Section 54B provides capital gains relief to a taxpayer who sells agricultural land and uses the profits to purchase further agricultural land. The following requirements must be met in order to claim the benefit under Section 54B:

  • The assessee must be an individual or a HUF, and
  • the asset transferred must be agricultural land, whether long-term or short-term capital. (It should be noted that rural agricultural property or agricultural land in a rural region is not a capital asset and hence is free from capital gains taxes.)
  • The person, his parents, or any member of the HUF must have utilised the agricultural land for agricultural purposes for at least two years immediately before the date of transfer of land,
  • and the taxpayer must purchase another agricultural property within two years of the transfer date.

However, under Section 10(37), no capital gain is taxable in the case of an individual or a HUF if the agricultural property is bought compulsorily under any legislation and the consideration is approved by the Central Government or the RBI and received on or after April 1, 2004.

ITR fillings for Individuals in India

Final Words

Clearly, despite the fact that agricultural income is tax-free, assessees must exercise caution when dealing with such revenue. They must ensure that agricultural revenue is aggregated with their overall income to avoid interest payments and other fines for income hiding. Assessees must also keep trustworthy documents in order to present tax authorities with verification of agricultural land ownership and documentation of agricultural revenue earned.

To summarise, there is sufficient room for taxing revenue from the non-agricultural activity. In reality, it is generally known that agriculturists do not have taxable income, since when it is shared among family members active in agricultural activities, each of them has income that falls inside the exemption level. However, there are hundreds of thousands of middlemen such as wholesalers, merchants, distributors, and so on who make a good living by dealing in agricultural goods as well as fruits, flowers, and so on. Such income or profits are fully taxable under current law, and if the Tax Department makes serious attempts to recover tax from them, the necessity for broadening the tax base to include agriculturists and farmers would be avoided.

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CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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