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Many people wondered if agricultural income is fully exempt from tax. Well, it is a truth, but not the whole truth. According to section 10(1) of the Income Tax Act of 1961, any income generated from any agricultural activities is exempted from tax by the government. This means if you generate income with other agricultural activities, you do not need to pay taxes ruled by the government for business farmers. But what is agricultural income, how to calculate it, and there are any chances to pay tax if we have other income apart from agricultural income? In this blog we clear all your doubts, so let’s start.
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Under section 2(1A) of the Income Tax Act of 1961, agricultural income is defined in simple terms:
• Any money earned from land in India that is used for farming.
• Any income from farming activities, including processing crops to make them ready for sale.
• Income from a farmhouse, but only if certain conditions are met.
• Income from growing plants or saplings in a nursery.
According to Section 10(1) of the Income Tax Act, agricultural income is not taxed. The power to tax agricultural income is with the state governments, not the central government. So, only the states can create laws to tax this type of income. However, agricultural income is still considered when calculating the overall tax rate for individuals, families, and certain groups, meaning it affects the tax slab but isn’t taxed directly.
In addition, agricultural income can be exempt from tax under certain circumstances, such as when it’s earned from selling agricultural land or from compensation received for land acquired by the government.
• Money earned from selling trees that have been replanted.
• Rent received for agricultural land.
• Money made from selling seeds.
• Income from growing creepers or flowers.
• Profits a partner makes from a firm or company involved in farming or agricultural work.
• Interest earned by a partner from investing money in farming-related businesses.
I know many of you have heard that agricultural income is tax-free, but that’s not the full story. According to the Income Tax Act, agricultural income is exempt from taxes, but it still counts when calculating your total tax if these conditions apply:
• Your agricultural income for the year is more than Rs. 5,000.
• Minus your total income and agricultural income, the amount you get must be much higher than the basic exemption limit.
Example of How to Calculate Tax on Indian Agriculture Income
Let’s refer to the following example to understand the process, or you can check the given image:
Particulars
• Agricultural Income: Rs. 2,45,890
• Non-Agricultural Income: Rs. 6,59,173
Step 1: Calculate tax on combined income (Rs. 2,45,890 + Rs. 6,59,173 = Rs. 9,05,063).
• Up to Rs. 3,00,000: Nil
• Rs. 3,00,000 to Rs. 7,00,000: Rs. 20,000
• Above Rs. 7,00,000: Rs. 20,506
Total Tax: Rs. 40,506
Step 2: Calculate tax on agricultural income plus basic exemption limit (Rs. 2,45,890 + Rs. 3,00,000 = Rs. 5,45,890).
• Up to Rs. 3,00,000: Nil
• Rs. 3,00,000 to Rs. 5,45,890: Rs. 12,295
Step 3: Tax liability =
• Tax from Step 1 – Tax from Step 2 = Rs. 40,506 – Rs. 12,295 = Rs. 28,212
• After applying rebate under Section 87A, the final tax payable is Rs. 3,212.
Example:
Income from farming and rental of agricultural land:
• Agricultural income: Earnings from crop production or animal husbandry.
• Non-agricultural income: Rent received from leasing out agricultural land for commercial purposes like construction or industry.
Income from dairy farming and selling dairy products:
• Agricultural income: Earnings from the sale of milk and dairy products directly from farming.
• Non-agricultural income: Profit from processing or packaging dairy products for retail sale.
Income from a mixed-use farm:
• Agricultural income: Income from the cultivation of crops (e.g., wheat, rice).
• Non-agricultural income: Income from setting up a farm-to-table restaurant or agritourism activities.
Income from poultry farming and selling processed chicken products:
• Agricultural income: Earnings from raising poultry and selling eggs.
• Non-agricultural income: Earnings from processing and selling chicken meat or other value-added products.
Income from growing medicinal plants and selling them for manufacturing:
• Agricultural income: Income from cultivating medicinal herbs.
• Non-agricultural income: Income from selling processed herbal products to pharmaceutical companies or as retail products.
These are examples where agricultural and non-agricultural activities coexist, with both sources of income being derived from the same land or business operation.
For tax purposes, agricultural income is usually not counted as part of your total income. But there are certain situations where agricultural income is added to your non-agricultural income when calculating taxes:
• Who it applies to: This rule is for individuals, Hindu Undivided Families (HUF), and Associations of Persons (AOP)/Bodies of Individuals (BOI).
• Minimum agricultural income: This rule applies only if your agricultural income is more than Rs. 5,000.
• Minimum total income: Your total income must be higher than the basic exempt limit (Rs. 2,50,000 duals, Rs. 3,00,000 for senior citizens, and Rs. 5,00,000 (all these amounts are divided by the individual super senior citizens)) for the tax to apply.
In simple terms, if your agricultural income is significant and your overall income is above the tax-free limit, both your agricultural and non-agricultural income will be combined for calculating tax.
This rule gives a tax break to people who sell their agricultural land and use the money to buy more agricultural land.
Conditions:
• Only individuals or Hindu Undivided Families (HUFs) can use this rule.
• The land being sold must have been used for farming by the individual or their parents for at least two years before the sale.
• The taxpayer must buy another agricultural land within two years of selling the old one.
In simple terms, if you sell farming land and reinvest the money in buying new farming land, you can get some relief from taxes—just make sure to meet the conditions!
As we discussed before in the “Tax Treatment of Agricultural Income in India” section, there is an exempt limit to pay tax, so if your income is not more than 2,50,000 (other income apart from agriculture), you do not need to file your income tax return.
In conclusion, agricultural income in India is generally exempt from tax, but it still plays a role in determining your overall tax liability when combined with non-agricultural income. Understanding the conditions and rules surrounding agricultural income can help you navigate tax calculations effectively. If you meet the requirements, you can also avail yourself of tax relief for reinvesting in agricultural land. Always stay informed about exemptions and thresholds to ensure proper tax compliance, or consult with a tax advisory firm.
CA Jitendra Agarwal, a Chartered Accountant, is an experienced Income Tax Advisor with a proven track record in tax planning and compliance.
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