What is Agriculture Income - Meaning, Types & Tax implications

Whether you are a farmer or someone with agricultural land holdings, understanding agriculture income and the nuances of income tax for agriculture is important. Proper knowledge can help you make informed financial decisions and potentially save a significant amount during tax season.

14,447 Views | Updated on: Apr 02, 2025

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Agriculture, alongside its allied sectors, is one of the largest sources of livelihood in India. Figures ascertained by the Food and Agriculture Organization (FAO) indicate that agriculture still serves as a primary source of income for about 70% of Indian rural households. The government, therefore, endeavors to boost this sector through schemes, policies, and tax exemptions for agricultural income.

What is Agricultural Income?

Agricultural income refers to the income earned or revenue generated from sources premised on agricultural activities. These sources of income include farming land, buildings on or identified with agricultural land, and commercial produce from horticultural land.

Section 2(1A) of the Income Tax Act, 1961, lays down the definition of ‘agricultural income’ under the following three activities:

Rent or revenue derived from agricultural land situated in India and used for agricultural purposes.
Income earned from agricultural land through the commercial sale of produce gained from this land.
Revenue derived from renting or leasing of buildings in or around agricultural land. However, this criterion is subject to the following conditions:

A farmer or cultivator should occupy this building through revenue or rent.
It is used as a residential space, warehouse/storeroom, or outhouse.
The land on which this building is located is assessed for land revenue or a local rate, which government officers evaluate and collect.

Categorizing a particular amount earned as agricultural income takes into account several other factors, such as:

The income earned should be from an existing piece of land.
Rent or revenue from the agricultural land and income earned by a cultivator through the sale of produce should be based on agricultural operations on a piece of land. Alongside income from agricultural operations, the ambit includes operations undertaken to make produce marketable.
The income should be generated by cultivating land. It covers all land produce, such as grain, fruits, commercial crops, etc. However, it does not include using a piece of land for poultry farming, livestock breeding, dairy farming, and the like.

The law does not require the cultivator to own the land in question in the case of agricultural operations. However, in the case of rent or revenue, an individual must possess an interest in the land, either as an owner or a creditor.

Types of Agricultural Income

When it comes to agricultural income, it is important to understand its various forms, as not all revenue generated in rural or farming contexts is considered agricultural for tax purposes. The income that qualifies must directly relate to farming activities or land use. This differentiation is key for farmers, policymakers, and tax authorities to ensure accurate tax reporting and compliance. Below is a breakdown of income sources that qualify as agricultural and those that fall outside this category, helping to clarify the scope of taxable versus non-taxable activities. Agriculture income includes:

Revenue from the sale of replanted trees
Income from selling seeds
Rent earned for agricultural land

However, not all income-generating agricultural activities fall under the category of agricultural income. The following are instances of non-agricultural income:

Profits from poultry farming or beekeeping
Returns from selling mature trees
Income derived from dairy farming

Agriculture Income Examples

Understanding what qualifies as agricultural income is essential for proper tax reporting and financial management. Knowing the difference between agricultural and non-agricultural income can help farmers, agribusiness owners, and policymakers navigate tax obligations more effectively by clarifying what falls under it and what does not. It also helps understand the core meaning of agriculture income.

Agricultural income refers to earnings directly tied to farming activities, while non-agricultural income stems from activities that do not directly involve cultivation or farming. Individuals can better manage their finances and avoid confusion during tax filing by identifying which activities fall under agricultural income. Below, we highlight some examples of both categories to provide clarity.

Apart from the ones mentioned above, here is one more example:

Profits or interest received by partners in firms engaged in agriculture
Earnings from cultivating flowers and creepers
Income from growing bamboo.

Examples of non-agricultural income include:

Profits from beekeeping or fisheries
Income from cutting and selling timber trees
Rent from film shoots on farmland

Agricultural Income in Income Tax in India

Under Section 10(1) of the ITA, 1961, agricultural income is exempt from taxation. This exemption implies that the Central Government does not impose or levy any tax on agricultural income.

However, agricultural income tax persists at the state level. The legislature uses a method called partial integration of agricultural income with non-agricultural income to tax such earnings. This method is applicable when an individual meets the conditions mentioned below:

Net agricultural income was more than ₹5,000 in the previous financial year.

Total income, minus this net agricultural income, is higher than the exemption limit of ₹2,50,000 for individuals below 60 years of age, ₹3,00,000 for senior citizens, and ₹5,00,000 for super senior citizens.

Calculation of Agricultural Income in India

A taxpayer aged 50 earns ₹3,00,000 in agricultural income and ₹5,00,000 in non-agricultural income. Consequently, the computation of her agricultural income tax for the financial year unfolds as follows:

Assessing tax on non-agricultural income plus net agricultural income, totaling ₹8,00,000 (₹3,00,000 + ₹5,00,000):

Tax on the first ₹2,50,000 is Nil.
Tax on the next ₹2,50,000 is ₹2,50,000 x 5% = ₹12,500.
Tax on the remaining ₹3,00,000 is ₹3,00,000 x 20% = ₹60,000.

Hence, the total tax on non-agricultural income plus net agricultural income is ₹72,500. (1)

Calculation of tax on net agricultural income plus maximum exemption limit as per slab rates, amounting to ₹5,50,000 (₹3,00,000 + ₹2,50,000):

Tax on the first ₹2,50,000 is Nil.
Tax on the next ₹2,50,000 is ₹2,50,000 x 5% = ₹12,500.
Tax on the remaining ₹50,000 is ₹50,000 x 10% = ₹10,000.
Therefore, the total tax here stands at ₹22,500. (2)

The final tax is calculated as the difference between the figures derived in Step (1) and Step (2). The difference, ₹50,000 (₹72,500 – ₹22,500), represents the final tax.

Adding the Health and Education cess at 4%, which amounts to ₹2000, her total tax liability amounts to ₹52,000.

Final Thoughts

Understanding agriculture income, income tax for agriculture, and the various types of income in the sector is essential for farmers and policymakers. As agriculture remains an important revenue sector for many economies, the taxation framework around it is designed to strike a balance between providing support to farmers and ensuring financial responsibility.

Agriculture income includes earnings from farming activities such as crop cultivation, agricultural land rent, and farmhouse revenue. While agriculture income is exempt from central income tax for agriculture under Section 10(1) of the Income Tax Act, indirect taxation applies if it surpasses certain limits by integrating it with non-agricultural income. The tax calculation considers various factors, including the nature of operations and land use. However, income from livestock or poultry farming is classified as non-agricultural and is, therefore, taxable under regular income tax provisions.

Farmers and landowners should engage with financial experts or tax professionals to navigate the complexities of agriculture income tax and make informed decisions in alignment with their financial goals and for guidance on maximizing benefits within the existing tax structure.

FAQs on What is Agriculture Income

Is agriculture income exempt from income tax?

Yes, agriculture income is exempt from income tax under Section 10(1) of the Income Tax Act in India. Still, if the income exceeds a certain limit, it may be indirectly taxed by combining it with non-agricultural income.

Who bears the burden of indirect taxes?

Agriculture income is calculated based on activities like crop production, agricultural land rental, and farmhouse income.

What types of activities qualify as agriculture income?

Agriculture income includes various types of produce from the land, such as grains, fruits, and commercial crops. However, it excludes earnings from poultry farming, livestock breeding, and dairy operations. This distinction is important for understanding what qualifies as agricultural income for tax purposes.