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What is Agricultural Income?

In India, agricultural income refers to income earned or revenue derived from sources that include farming land, buildings on or identified with an agricultural land and commercial produce from a horticultural land. Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961. According to this Section, agricultural income generally means: (a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). (d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Examples of Agricultural Income

The following are some of the examples of agricultural income:

  • Income derived from sale of replanted trees.

  • Income from sale of seeds.

  • Rent received for agricultural land.

  • Income from growing flowers and creepers.

  • Profits received from a partner from a firm engaged in agricultural produce or activities.

  • Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

Examples of Non-Agricultural Income

The following are some of the examples of non-agricultural income:

  • Income from poultry farming.

  • Income from bee hiving.

  • Any dividend that an organization pays from its agriculture income.

  • Income from the sale of spontaneously grown trees.

  • Income from dairy farming.

  • Income from salt produced after the land has flooded with sea water.

  • Purchase of standing crop.

  • Royalty income from mines.

  • Income from butter and cheese making.

  • Receipts from TV serial shooting in farm house.

Is Agricultural Income Taxable?

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The central government cannot levy tax on the agricultural income received. However, agricultural income is considered for rate purposes while assessing the income tax liability if the following two conditions are met:

  • Net agricultural income is greater than Rs. 5,000/- for previous year.

  • Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs. 2,50,000 for individuals below 60 years of age and Rs. 3,00,000 for individuals above 60 years of age).

If these two conditions are met, tax liability shall be computed in the following manner:

Step 1: Let us regard agricultural income as X and other income as Y Tax computed on X+Y is B1

Step 2: Let us regard basic exemption slab for income tax payment as A Tax computed on A+X is B2

Step 3: The actual income tax liability shall be B1-B2

Note: If the individual’s aggregate agricultural income is up to Rs. 5,000, the individual will have to disclose the agricultural income in the income tax return (ITR). In case the agricultural income crosses Rs. 5,000, the individual will have to disclose the agricultural income in ITR 2.

Section 54B of the Income Tax Act, 1961

Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their agricultural land and use the sale proceeds to acquire another agricultural land. To claim tax benefit under Section 54B of the Income Tax Act, the following conditions will have to be satisfied:

  • This benefit can only be claimed by an individual or a HUF

  • The agricultural land should be used by the individual or his or her parents for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred. In case of HUF, the land should be used by any member of HUF.

  • The taxpayer should purchase another agricultural land within two years from the date of selling the old land. In case it is an incident of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation. It must be noted that under Section 10(37), capital gain shall not be chargeable to tax if agricultural land is compulsorily acquired under any law, and the consideration of which is approved by the central government or banking regulator and received on or after 01-04-2004.

FAQs

What is agricultural income under the Income Tax Act?

Agricultural income refers to income earned or revenue derived from sources that include farming land, buildings on or identified with an agricultural land and commercial produce from a horticultural land. Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961. According to this Section, agricultural income generally means:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

(b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.

(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).

(d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

What if agricultural activities are carried on urban land?

Income derived from agricultural activities carried out on land - be it urban or rural - shall be treated as agricultural income and be exempt from tax.

Will income from animal husbandry be considered as agricultural income?

No, income from animal husbandry will not be considered as agricultural income.

How to calculate tax on agricultural income?

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The central government cannot levy tax on the agricultural income received. However, agricultural income is considered for rate purposes while assessing the income tax liability if the following two conditions are met:

  • Net agricultural income is greater than Rs. 5,000/- for previous year.

  • Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs. 2,50,000 for individuals below 60 years of age and Rs. 3,00,000 for individuals above 60 years of age.)

If these two conditions are met, tax liability shall be computed in the following manner:

Step 1: Let us regard agricultural income as X and other income as Y. Tax computed on X+Y is B1.

Step 2: Let us regard basic exemption slab for income tax payment as A. Tax computed on A+X is B2.

Step 3: The actual income tax liability shall be B1-B2.

Is agricultural income wholly exempt from income tax?

Agricultural income is wholly exempt from tax provided that the individual's i) total agricultural income is less than Rs. 5,000 and ii) the total income, excluding agricultural income, is less than basic exemption limit.

What is not considered as agricultural income in India?

The following are examples of non-agricultural income:

  • Income from poultry farming.

  • Income from bee hiving.

  • Any dividend that an organization pays from its agriculture income.

  • Income from the sale of spontaneously grown trees.

  • Income from dairy farming.

  • Income from salt produced after the land has flooded with sea water.

  • Purchase of standing crop.

  • Royalty income from mines.

  • Income from butter and cheese making.

  • Receipts from TV serial shooting in farm house.

Agricultural income includes:

  • Income derived from sale of replanted trees.

  • Income from sale of seeds.

  • Rent received for agricultural land.

  • Income from growing flowers and creepers.

  • Profits received from a partner from a firm engaged in agricultural produce or activities.

  • Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

What is Section 54B of the Income Tax Act, 1961?

Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their agricultural land and use the sale proceeds to acquire another agricultural land. To claim tax benefit under Section 54B of the Income Tax Act, the following conditions will have to be satisfied:

  • This benefit can only be claimed by an individual or a HUF.

  • The agricultural land should be used by the individual or his or her parents for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred. In case of HUF, the land should be used by any member of HUF.

  • The taxpayer should purchase another agricultural land within two years from the date of selling the old land. In case it is an incident of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation. It should be noted that under Section 10(37), capital gain shall not be chargeable to tax if agricultural land is compulsorily acquired under any law, and the consideration of which is approved by the central government or banking regulator and received on or after 01-04-2004.

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