Agriculture, alongside its allied sectors, exists as one of the largest sources of livelihood in India. Figures ascertained by the Food and Agriculture Organisation (FAO) indicate that agriculture still serves as a primary source of income for about 70% of the Indian rural households. The government, therefore, endeavours to boost this sector by means of schemes, policies, and tax exemptions for agricultural income.
Agricultural income refers to the income earned or revenue generated from sources essentially premised on agricultural activities. These sources of income include farming land, buildings on or identified with agricultural land as well as commercial produce from a horticultural land.
Section 2(1A) of the Income Tax Act, 1961, lays down the definition of ‘agricultural income’ under the following three activities:
Categorising a particular amount earned as agricultural income takes into account several other factors, such as:
The table below summarises the different types of agricultural income:
|Basis of Differentiation||Types of Agricultural Income|
|Source of income||Rent or revenue generated from a piece of land.||Income derived from agricultural operations.||Income from a building attached to agricultural land.|
|Example of agricultural income||Rent received by an owner of the land from the cultivator in cash or in-kind.||Income earned by a cultivator by way of sale of his/her produce.||Rent received on a building used as a warehouse by a cultivator.|
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 the conditions mentioned below are met by an individual:
When the aforementioned criteria are met by an individual, his/her tax on agricultural income is computed using a three-step calculation:
Step 1: Evaluating tax on non-agricultural income + net agricultural income.
Step 2: Calculation of tax on net agricultural income + maximum exemption limit as per slab rates.
Step 3: Calculation of the final tax as a difference of the figures derived in Steps 1 and 2. This step derives the following –
The example discussed below provides a detailed explanation of this process –
An individual taxpayer aged 50 years earns Rs. 3,00,000 in agricultural income. Her non-agricultural income is worth Rs. 5,00,000. Therefore, her agriculture income tax for the FY is calculated as follows:
|Step 1: Evaluating tax on non-agricultural income + net agricultural income, i.e., Rs. 8,00,000 (Rs. 3,00,000 + Rs. 5,00,000) Tax on the first Rs. 2,50,000 = Nil
Tax on the second Rs. 2,50,000 = Rs. 2,50,000 x 5% = Rs. 12,500
Tax on balance Rs. 3,00,000 = Rs. 3,00,000 x 20% = Rs. 60,000
So, the total tax on non-agricultural income + net agricultural income is Rs. 72,500. (1)
|Step 2: Calculation of tax on net agricultural income + maximum exemption limit as per slab rates, i.e., Rs. 5,50,000 (Rs. 3,00,000 + Rs. 2,50,000)Tax on the first Rs. 2,50,000 = Nil
Tax on next Rs. 2,50,000 = Rs. 2,50,000 x 5% = Rs. 12,500
Tax on balance Rs. 50,000 = Rs. 50,000 x 10% = Rs. 10,000
So, the total tax here stands as Rs. 22,500. (2)
|Step 3: Calculation of the final tax as a difference of the figures derived in Step 1 and 2. The difference between (1) and (2) is Rs. 50,000 (Rs. 72,500 – Rs. 22,500).
So, final tax = Rs. 50,000
(+) Health and Education cess @ 4% = Rs. 2000
Therefore, her total tax liability amounts to Rs. 52,000.
Agricultural revenue should be reported in ITR 1 under the Agriculture Income column. However, ITR 1 can only be used if your agricultural income is less than Rs 5,000. If the stated income exceeds this limit, form ITR-2 must be filed.