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What is Agriculture Income Tax, and Different Types of Agriculture Income

Agriculture income tax is levied on earnings derived from agricultural activities. These include numerous sources of income from farming land to commercial produce from horticultural land.

  • 3,320 Views | Updated on: Mar 21, 2024

Agriculture, alongside its allied sectors, exists as 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 by means of 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 evaluated and collected by government officers.

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 way of cultivation of 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.
  • In the case of agricultural operations, the law does not necessitate the cultivator to be the owner of the land in question. However, in the case of rent or revenue, an individual must possess an interest in the land, either as an owner or a mortgagee.

Types of Agricultural Income

Understanding the types of agricultural income is crucial for farmers, policymakers, and tax authorities alike. Agriculture income includes:

  • Revenue from the sale of replanted trees
  • Income from selling seeds
  • Rent earned for agricultural land
  • Earnings from cultivating flowers and creepers

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

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

Farmers 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.

Key Takeaways

  • Agricultural income is the revenue generated from sources essentially premised on agricultural activities.
  • Under Section 10(1) of the ITA, 1961, agricultural income is exempt from taxation by the Central Government; however, state taxation is applicable in some cases.
  • Categorizing a particular amount earned as agricultural income takes into account several factors.
  • The legislature uses a method of agricultural and non-agricultural income to tax such earnings.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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