Agriculture plays a vital role in India’s economy, and over 50% of India’s workforce is engaged in agricultural activities. From the surface, it appears that agricultural income is exempt from income tax, but it’s not as easy as it appears. Let’s get into the details of agricultural income tax.
Agricultural income includes the earnings or revenue derived primarily from agricultural activities on designated agricultural land. These activities include cultivating land, utilizing buildings situated on agricultural land, and harvesting commercial produce from horticultural land.
Agricultural income includes the earnings or revenue derived primarily from agricultural activities on designated agricultural land. These activities include cultivating land, utilizing buildings situated on agricultural land, and harvesting commercial produce from horticultural land.
a) Any rent or revenue derived from land that is situated in India and is used for agricultural purposes.
b) Agricultural income encompasses revenue generated from the production of agricultural goods that necessitate processing before they can be marketed. For example, oats require husk removal before they can be sold.
c) Agricultural income includes earnings derived from cultivating and selling agricultural produce directly from agricultural land. For instance, revenue from the sale of tomatoes grown on agricultural land is considered part of agricultural income
(d) Any income attributable to a farmhouse** subject to the satisfaction of certain conditions specified in this regard in section 2(1A). Also, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
**Income from a farmhouse is exempt from tax if it meets certain criteria defined in section 2(1A) of the Income Tax Act:
| Aerial distance from the municipality | Population |
|---|---|
| Within 2 km | 10,000 to 1,00,000 |
| Within 6 km | 1,00,000 to 10,00,000 |
| Within 8 km | > INR 10,00,000 |
In India, agricultural income is treated differently from other types of income for tax purposes. As per the Income Tax Act, agricultural income is exempt from income tax and is not included in the total income while calculating tax liability.
However, the income tax act indirectly taxes the agricultural income using a method called partial integration of agricultural income with non-agricultural income. This method taxes the non-agricultural income at higher tax rates.
This method applies to HUFs, AOP, BOIs, and artificial judicial persons and does not apply to companies, LLPs, cooperative societies and local authorities.
Here are the conditions that need to be met -
If net agricultural income exceeds Rs. 5,000 during the year and non-agricultural income is above the basic exemption limit, the following thresholds apply:
There is a complete tax rebate on agriculture income in these cases:-
But if your agricultural income exceeds Rs. 5,000 and you have other sources of income, then the tax liability for that year is to be calculated as follows and applicable to Individuals, HUFs, AOPBOIs, and Artificial Judicial Persons.
Suppose you earn Rs. 4,00,000/- as salary income and Rs. 90,000/- as agricultural income for the assessment year 2024-25.
The computation shall be as follows:
a. Calculate tax on total income of Rs 4,90,000 (old tax regime)
| Particulars | Amount |
|---|---|
| Tax on Rs 2,50,000 | Nil |
| Tax on remaining Rs 2,40,000 @ 5% | 12,000 |
| Total Tax | 12,000 |
b. Calculate tax on basic exemption limit + agricultural income:
| Particulars | Amount |
|---|---|
| Tax on Rs 2,50,000 | Nil |
| Tax on remaining Rs 90,000 @ 5% | 4,500 |
| Total Tax | 4,500* |
The tax liability, in this case, shall be Rs. 7,500 (a-b), i.e., Rs 12,000 – Rs 4,500, and there’s no extra tax payable owing to the extra income of agriculture net tax payable= 7500 + 4%=7800
*Please note that Rebate u/s 87A, surcharge and Cess will be applicable in addition to the tax calculated. Standard deduction of Rs. 50000 has not been considered in the example.
Say you’ve earned a salary income of Rs 500000 and an agricultural income of Rs 500000 during the A.Y. 2024-25
a. Calculate tax on total income of Rs 10,00,000(old tax regime)
| Particulars | Amount |
|---|---|
| Tax on Rs 2,50,000 | Nil |
| Tax on the next Rs 2,50,000 @ 5% | 12,500 |
| Tax on remaining Rs 5,00,000 @ 20% | 100000 |
| Total Tax | 112500 |
b. Calculate tax on basic exemption limit + agricultural income i.e.
| Particulars | Amount |
|---|---|
| Tax on Rs 2,50,000 | Nil |
| Tax on the next Rs 2,50,000 @ 5% | 12,500 |
| Tax on remaining Rs 250000 @ 20% | 50000 |
| Total Tax | 62500 |
| Tax on Non-Agricultural Income i.e., Rs 112500-Rs. 62500 | 55000 |
| Less: Rebate u/s 87A | 12500 |
| 37500 | |
| Add: EC & SHEC @@4% | 1500 |
| Total Tax Payable | 39000 |
If the assessee has a salary income of 500000, the tax would have been 12500, which would again set-off against rebate of 87A, and so the tax payable would have been Nil, whereas, in the above case, the tax payable due to shift in slab because of huge agricultural income will be more than 12500 as shown above. Therefore, even though agricultural income is exempt, you’ll have to pay some tax on agricultural income.
Section 54-B gives relief of capital gains to a taxpayer who sells his agricultural land and, from the sale proceeds, acquires another agricultural land. The conditions for claiming the benefit u/s 54B are:
However, as per section 10(37), no capital gain would be chargeable to tax in case of an individual/HUF if the agricultural land is compulsorily acquired under any law whose consideration is approved by the Central Government or RBI and consideration received on or after 01.04.2004.
The amount of exemption u/s 54B shall be the lower of the following:
For example:- if you sold agricultural land in April, 2019 for Rs. 25,20,000 and the long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. In December 2019, you purchased another agricultural land worth Rs. 5,00,000. Then, the agricultural income tax calculation for AY 2019-20 in your hand would be calculated as follows:
| Particulars | Amount (In Rs.) |
|---|---|
| Long-term capital gain arising on transfer of old land | 8,40,000 |
| Less: Exemption under section 54B (*) | 5,00,000 |
| Taxable Long-Term Capital Gains | 3,40,000 |
(*) Exemption under section 54B will be lower of the following:
Thus, the exemption will be of Rs. 5,00,000.
Also, if a taxpayer purchases a new agricultural land just to claim exemption u/s 54B and subsequently transfers the new piece of land within 3 years from the date of its acquisition, then the benefit granted under section 54B will be withdrawn.
If an individual has agricultural income up to Rs. 5,000, In this case, they can use ITR-1 (Sahaj) to file ITR (Income Tax Return). Agricultural income up to Rs. 5,000 can be included in the column provided for Agricultural Income in ITR-1.
If an individual has agricultural income exceeding Rs. 5,000, then ITR-1 (Sahaj) cannot be used, and they must file an Income Tax Return using ITR-2. In ITR-2, there is a specific schedule (Schedule EI) to report agricultural income, regardless of its amount.
Agricultural income in ITR 1 is to be shown under the column of Agriculture Income. But ITR 1 can only be used if the agricultural income is up to Rs 5,000. In case the said income exceeds this limit, ITR-2 is required to be filed.
We hope now there’s clarity on how much tax is actually payable by you on the earnings from the agricultural land and the benefits of agricultural land in capital gain!
Are you unsure about the taxability and treatment of agricultural income? Our team of tax experts can provide you with the guidance you need for income tax filing. Whether you have questions about the exemption limit, calculating taxes, or showing agricultural income in your ITR, we have the knowledge and experience to assist you. Don't let the complexities of agricultural income taxation hold you back. Book eCA today! and ensure timely filing before the income tax return's last date!
