Agricultural Income- Applicability, Calculation & Rebate
Agricultural income criteria
In this post, we will talk about agricultural income in India, as well as its other features. Let’s go through each section in detail:
What is Agricultural Income?
According to Section 2 (1A) of the Income Tax Act, agricultural income is defined as follows:
(a) Any rental or revenue obtained from land in India that is used for agricultural purposes.
b) Any income generated from such land through agricultural operations, including processing agricultural produce for sale.
(c) Any revenue attributable to a farmhouse, subject to the fulfilment of specific requirements mentioned in section 2. (1A). Therefore, any money received from saplings or seedlings cultivated in a nursery is considered agricultural income.
Examples of Agricultural Income
- Profits from the replanting of trees.
- Rent collected from agricultural land subletting.
- Earn money by growing flowers and creepers.
- Profit share of a partner in an agricultural operations business.
- A partner received an interest on cash from an agricultural business.
- Profits from the sale of seeds.
Examples of Non-Agricultural Income
- Earnings from chicken farming.
- Income from beekeeping.
- Profit from the selling of naturally produced trees.
- Earnings from dairy farming.
- Purchase of a standing crop.
- A dividend paid by a firm from its agricultural income.
- The money received from salt created by flooding any area of agricultural land with seawater.
- Mine royalties.
- Profits from the production of butter and cheese.
- Receipts from a television series shot at a farmhouse.
Is Agricultural Income Taxable?
Agricultural income is free from taxation under Section 10(1) of the Income Tax Act of 1961. The central government is not allowed to tax agricultural revenue. However, agricultural income is considered for rate purposes for determining income tax liability if the following two conditions are met:
- The previous year’s net agricultural revenue was more than Rs. 5,000/-.
- Total income, minus net agricultural revenue, exceeds the basic exemption level (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 requirements are satisfied, the tax liability is calculated as follows:
Step 1: Consider agricultural revenue to be X and other income to be Y. B1 is the tax calculated on X+Y.
Step 2: Assume that the basic exemption slab for income tax payment is A. The tax calculated on A+X is B2.
Step 3: The real income tax liability will be B1-B2.
Note: If an individual’s total agricultural income is less than Rs. 5,000, the individual must mention the agricultural income on his or her income tax return (ITR1). If an individual’s agricultural income exceeds Rs. 5,000, the individual must report the agricultural income in ITR 2.
Calculation of Agricultural Income Tax
If an individual meets the above conditions, his or her agricultural income tax is as follows:
Mr. Raj, for example, receives Rs 1,50,000 in farm income and Rs 6,00,000 in commercial income throughout the financial year. Because agricultural revenue exceeds Rs 5000, it is subject to partial integration with non-agricultural income collected during the financial year.
Step 1 : Calculate the tax payable on Agricultural and Non-Agricultural Income
Mr. Raj is subject to a basic exemption limit of Rs 2,50,000 with a tax slab of individuals other than senior citizens. The total income is Rs 7,50,000 payable is Rs 62,500.
Step 2 : Calculate the tax due on non-agricultural income and the basic exemption limit. The basic exemption limit for non-agricultural income is Rs 4,00,000 (Rs 1,50,000 and Rs 2,50,000). The total tax due on Rs 400,000 is Rs 7,500.
Step 3 : Net tax payable will be the difference between tax payable under step-1 and step-2. Net tax payable is Rs 55,000 (Rs 62,500 – Rs 7,500).
Rebate on Agriculture Income
A complete tax rebate is possible if:
- The total agricultural income is < Rs. 5,000.
- The income from agricultural land is your only source of income (no other income)
- You have both agricultural income and other income. The total income (excluding agricultural income) is less than the basic exemption limit.
Treatment of Agricultural Land in Capital Gain
Section 54B provides assistance to taxpayers who make capital gains on the sale of agricultural land and use the profits to purchase further agricultural land. The conditions for claiming the benefit u/s 54B are:
- The taxpayer should be an individual or HUF
- Asset transferred should be agricultural land, whether a long-term capital asset or short-term capital asset. (Note that rural agricultural land or agriculture land in the rural area is not a capital asset, and hence it is exempt from capital gains)
- The agricultural land should be used by the individual or his/her parents or any member of HUF for agricultural purposes for at least two years immediately preceding the date of transfer of land, and;
- The taxpayer should acquire another agricultural land within two years from the transfer date.
However, under Section 10(37), no capital gain is charged in the case of an individual/HUF if the agricultural property is purchased compulsorily under any statute whose consideration is approved by the Central Government or RBI and received on or after April 1, 2004.
We have reached the conclusion of this post on agricultural income in India. Feel free to share your views and opinions with us in the comment section below.
FAQs
Farmers in India are now free from paying income tax to the government.
Yes, cultivating tea is classified as an agricultural income. As a result, 40% of such earnings are subject to business income taxation. The remaining 60% is tax-free since it is classified as agricultural income.
No, such agricultural earnings are not exempt. For a tax exemption, the agricultural land must be located in India.
