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Calculation, Treatment & Taxability of Agricultural Income

Overview

Agricultural income is the rent or revenue generated from land which is used for agricultural purposes. It also includes income from agricultural operations by selling agricultural products in the market. Till date, taxes on agricultural income is exempted; however, the state government can levy taxes on the agricultural income. This income is generally considered for rate purposes for calculating the liable income tax for an individual.

What is Agricultural income?

In India, Agricultural income is generally classified as a valid source of income. It comprises income from agricultural land and commercial products produced from it, buildings on or related to any agricultural land.

According to section 2(1A), agricultural income is defined as:

  • A. Any rent or revenue generated from land in India and is used for agricultural purpose.
  • B. It includes the income generated from agricultural operations including processing of agriculture produce for sale in the market.
  • C. Income earned from farmhouse which may be used as storehouse or dwelling unit.
  • D. Any income which is earned by selling saplings or seeds grown in the nursery.
  • E. Share - profits received from your partner who is engaged in agricultural activities.
  • F. Income received from a building situated near the agricultural land will be treated as an agricultural income if the below-mentioned conditions are satisfied:
    • The building must be occupied by the cultivator.
    • The building is used as dwelling house or storehouse.
    • The land is either assessed to land revenue in India or it is subject to a local rate assessed.

    However, agricultural income does not include the following:

    • Income generated by selling processed produce of agricultural nature
    • Income from extremely processed produce
    • Income from trees sold as timber

Agricultural Revenue that does not come under agricultural income

All revenue generated from land may not fall under Agricultural income.

Some incomes generated from such activities and are not considered as agricultural income in India are as follows:

  • Income earned by poultry farming
  • Income or revenue generated from bee hiving
  • Income obtained from dairy farming and spontaneously grown trees.
  • Income earned by producing salt by flooding land with sea water.
  • Revenue generated by purchasing standing crops.
  • Income earned from butter and cheese making.
  • Income generated from T.V. serials being shot in farmhouses is not considered as agricultural income.

Composition of Agricultural Income

Agricultural income is defined u/s 2(1A) and exempted under u/s 10(1) of Income Tax Act

A revenue generated from the following three heads comes under Agricultural Income:

  1. Any rent or income generated from land situated in India and used for agricultural activities: An individual is not liable to pay tax on the rent or revenue generated if it fulfils the following conditions –
    • If the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by government officers.
    • If the land is situated within the jurisdiction of municipality and cantonment board with a population of more than 10 thousand as per the latest census in which the sale of land took place.

      Moreover, the land should not be situated at any of the following locations:

      • The land should not be situated not more than 2km away from the local limits of any cantonment board or municipality and the density should be more than 10,000 but not more than one Lakh.
      • The area should be within six km from the local limits of any municipality and cantonment board with a population more than 1, 00,000 but less than 10, 00,000.
      • The area which is not more than 8 Km. from the local limits of any municipality and cantonment board, with a population above 10, 00,000.
    • The income generated by transferring agricultural land (said above) does not come under agricultural income.
  2. Any revenue generated from agricultural operations from these land (said above): It includes processing of agricultural produce, rent received via cash or kind so that it can render in the market or sell the produce.
  3. Any income generated from building own/occupied by the assessee: It includes the rent generated from the land that carries out agricultural operations. It must be in the immediate vicinity of the land.

Further, to consider the income generated as an agricultural income, you should keep in mind the following key points:

  • There must be an existence of land: For treating land as an agricultural income, firstly there must be an existence or presence of land.
  • The land should be used for agricultural purposes: The land must be used only for agricultural purposes. The main purpose of the land includes cultivating crops, rent, and revenue generated by selling the produce.
  • It is necessary to use the land for cultivation: The land should be used for agricultural operations. For instance – land producing grain, tea, coffee, fruits, commercial crops, groves, grasslands, plantations, spices, etc.
  • Ownership in not necessary: it is not compulsory that the cultivator is always the owner of the land, he could be tenant or subtenant. In the case of rent or revenue, it is essential that assessee should have an interest in the land as an owner or mortgagee.

Why is agricultural income exempted from Taxation?

Under Section 10(1) of the Income-tax Act, 1961 deals with a tax on agricultural income. All agricultural incomes are not exempted under the Income tax act. Under this constitution, only the state government has the power to levy tax on agricultural income. Central government excludes agricultural income from the purview of Central Income Tax.

As per the latest update, if the income from agriculture is less than Rs. 5,000 then the income from agriculture will not be accounted for tax purposes. And if the revenue generated from agriculture is more than the minimum limit then the agriculture income will be taxable as per the applicable tax or Tax Deducted at Source (TDS) rates. According to the finance act, the total tax liability of an individual will include agricultural income added to the non-agricultural portion. If the income earned in the financial year is only from agricultural, then it is not required to file income tax return. And the agricultural losses can be set off against the agricultural profits for the next 8 years.

Tax calculation with agricultural Income

Income from agriculture is exempted from tax under section 10(1) of the Income Tax Act, 1961.

The following conditions should be satisfied to calculate tax liability:

  • Income from agriculture should be more than Rs.5, 000.
  • Total income for the financial year, excluding agricultural income, should exceed INR 2, 50,000. This limit will increase to 3, 00,000 in case of individual who is above 60 and less 80 and will be 5, 00,000 for individual who is above 80.

Rules for computing Tax

If you are an individual with agricultural income you should keep in mind the following rules while calculating your tax:

  • Include agricultural income while computing your liable tax. For Example - Mr. Ram has a total income (excluding agricultural income) of Rs. 7, 00,000 and Net Agricultural Income of Rs. 1, 00,000. Then the tax will be computed on his total income of Rs. 8, 00,000. Thus, income tax liability will be of Rs. 72,500 for an individual whose age is below 60 years.
  • Add the applicable basic tax slab benefit to the net agricultural income. Tax slab benefit for an individual below age 60 is Rs.2, 50,000; for an individual whose age is above 60 years and less than 80 years is Rs.3, 00, 00; and for individual above 80 years of age is Rs. 5, 00,000. Example: as per the above example, Mr. Ram’s basic tax slab benefit is Rs.2, 50,000 and Net Agricultural Income is Rs.1, 00,000. Now the tax liability will be computed on Rs.3, 50,000. The amount of tax will be Rs. 5,000.
  • Subtract the tax calculated in the second step from the first step, which will be Rs.67, 500 without the deduction of cess.

Agricultural Income and Money Laundering

Money laundering is the process by which money earned through crime and corruption is converted into “legitimate” Assets. In India, big businessmen and politicians launder their money using income from agricultural land.

Agricultural income has become a source for money laundering as it is exempted from taxes. The country is losing billions in revenues because of money laundering. Politicians purchase agricultural land at a very nominal rate around INR 20,000 per Acre in central areas of the country. And during the agricultural season (kharif and Rabi) they allow farmers to grow the crops on their land. Sugarcane and cotton are grown in kharif season while groundnuts are grown in Rabi season. Majority of farmers in India are not educated so they don’t maintain detailed records and this is in turn misused by politicians and businessmen. As they give the opportunity to pass off unaccounted cash income as agricultural income.

Businessmen set off their business profits against fictitious expenses. These fictitious expenses could be used for billing for travel; eating and can reimburse it later. After reimbursement, it is transferred into their bank account and at the time of computation of tax, they show the receipts of agricultural produce to show that as agricultural income, which is not taxable in India.

Further, these large number of agricultural land purchased by the politicians at very cheap cost are sold at very high rate. Sale of agricultural land is not considered as “Capital Asset” and hence no tax is imposed on the sale of land and huge profits are earned on the sale of land by the politicians.

The ongoing debate on taxing Agricultural Income

Agricultural income is exempted from income tax under section 10(1) of the IT Act. So far, no law has been agreed on taxing agricultural income. However, many people believe that agricultural income should be taxed, quoting that since historical period, the tax from agricultural revenue is a major contribution to the society. Though the government of Modi had not yet approved the advice on the same, many debates and discussions are going on.

Some officials want that tax on agricultural income should be implemented. They are supporting this because they want no distinction between rural and urban. The impact of the tax on rural income should be same as that of urban income. However, taxing agricultural income requires an amendment in income tax act, as central government cannot charge tax on income from agriculture.

The government may avoid, taxing the entire agricultural income, as they are planning to exempt agricultural income from farmers who are having land holding up to five acres. They are also planning to exempt income arising from the cultivation of rice, wheat, and vegetables. The main objective behind this is to tax the agricultural income of rich farmers.

Taxing agricultural income will be beneficial in following ways:

  • It will encourage farmers to maintain records
  • Will help the government to target the schemes like MNREGA for small farmers.
  • Will help the private institutions who lend money to identify the potential borrowers based on their CIBIL score.
  • Cases of money laundering will be reduced.
  • It will surely improve the tax to GDP ratio.

Conclusion

Agricultural income is the income earned from land which is used for agricultural purpose. As per section 10(1), agricultural income is exempted from tax. But all incomes from agriculture are not exempted from tax.

Some key points of agricultural income that an individual need to keep in mind are as follows:

  • The revenue generated should be from land
  • The revenue should be used for agricultural operations on the land
  • The revenue should be from the cultivation of the land
  • It is not necessary that the existing land is under the ownership of assessee

Frequently Asked Questions

Q. If agriculture operations are carried on urban land, then does the income generated from the land comes under agricultural income?
Yes, it doesn’t matter whether the land is at rural or urban. If agricultural operations are carried out on any land in India and income is generated from the sale of such agricultural produce then that income will be treated as an agricultural income.
Q. I have income from industry and farm, will my tax be exempted?
Your Agricultural income will be exempted if it fulfills all the criteria. However, for calculating non-agricultural income, your agricultural income will be considered for selecting the liable tax rate.
Q. Is income from Animal Husbandry taxable?
Yes, the income from animal husbandry is taxable as it does not come under Agricultural income.
Q. At what rate income tax is charged on manufacturing tea, coffee, and rubber?
There are different rates charged on the income derived from the manufacturing of tea, coffee, and rubber. 40% is charged on tea, 35% is charged on rubber and 25% is charged on coffee.
Q. Is income from grass sold is an agricultural income?
No, it’s not an agricultural income as income earned from spontaneously grown grass/tree is not an agricultural income and hence such income is taxable.