Important Keyword: Agriculture Income, Income Heads, Income Tax.
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Tax on Agricultural Income
In the Union Budget of 2023-24, the government earmarked around 1.25 lakh crore rupees for agriculture and its welfare schemes in India. Agriculture continues to be a vital source of income for approximately 70% of Indian households. Given India’s agrarian economy, there are numerous incentives and benefits available to those engaged in agriculture. For instance, farmers are exempt from paying taxes on their agricultural income under Indian income tax laws. However, it’s important to note that not all income derived from agricultural land is considered agricultural income for tax purposes.
What is Agricultural Income?
According to section 2(1A) of the Income Tax Act, 1961, agricultural income is defined as follows:
- Rent or revenue derived from land: This applies to land situated in India and used for agricultural purposes.
- Income derived from agricultural operations: This includes basic operations such as cultivation, sowing seeds, and subsequent operations like weeding and harvesting.
- Income from the sale of agricultural produce: If the produce undergoes ordinary processes to become marketable, the income from its sale is considered agricultural income.
- Income derived from saplings or seedlings: Revenue generated from the sale of saplings or seedlings is considered agricultural income.
- Income attributable to a farmhouse: Income from a farmhouse is considered agricultural income if certain conditions specified in section 2(1A) are met. For instance, the farmhouse should be located on agricultural land or in its immediate vicinity.
The land should not be located within the following region:
| Aerial distance from municipality* | Population as per the last preceding census |
| 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 |
The term “municipality” encompasses various local governing bodies, including a municipal corporation, notified area committee, town area committee, town committee, and cantonment board.
It’s important to note that even if the local population is less than 10,000, the land should not be situated within the jurisdiction of the local municipality or cantonment board. This condition applies regardless of the size of the population in the area.
Non-agricultural income
As previously mentioned, certain activities related to agriculture and the income derived from them fall under the category of non-agricultural income and are subject to taxation.
- Heavy Processing: When agricultural produce undergoes significant processing to become marketable, the resulting product is considered non-agricultural. Examples include tea, coffee, and rubber production. If a farmer sells processed items without engaging in agricultural or processing operations, the income is categorized as business income.
- Livestock Breeding: This includes activities such as dairy farming, fishery, and poultry farming conducted on agricultural land.
- Tree Plantation: Trees grown solely for timber on farmland are classified as non-agricultural income since no active agricultural business is involved in the process.
- Trading: Individuals who earn income by trading agricultural produce are subject to standard taxes on their earnings.
- Export: Income generated from the export of agricultural produce may be exempt from income tax if certain conditions are met.
Tax on Agricultural Income
Certainly, let’s walk through the computation for the given example:
- Compute income tax on aggregate income: The taxpayer’s total income is the sum of interest income and agricultural income, which is INR 9,00,000. We’ll calculate the tax liability on this total income.
- Compute income tax on the sum of the basic exemption limit plus agricultural income: The basic exemption limit for the assessment year 2023-24 is INR 2,50,000. Since the agricultural income exceeds INR 5,000, we add the basic exemption limit to the agricultural income, totaling INR 2,53,000. We’ll calculate the tax liability on this sum.
- Calculate the difference between the two tax liabilities: Subtract the tax liability calculated in step 2 from the tax liability calculated in step 1.
Let’s perform the calculations to find out the tax liability for the year.
To illustrate:
- Compute income tax on aggregate income: Total income (Interest income + Agricultural income) = INR 9,00,000Tax liability on total income = Tax computed as per applicable tax rates
- Compute income tax on the sum of the basic exemption limit plus agricultural income: Sum of basic exemption limit and agricultural income = INR 2,53,000Tax liability on this sum = Tax computed as per applicable tax rates
- Calculate the difference: Tax liability for the year = Tax liability on aggregate income – Tax liability on basic exemption limit plus agricultural income
Calculate tax on total income of INR 9,00,000
| Particulars | Amount (INR) |
|---|---|
| Tax on INR 2,50,000 | Nil |
| Tax on the second 2,50,000 @5% | 12,500 |
| Tax on remaining INR 4,00,000 @ 20% | 80,000 |
| Total Tax (A) | 92,500 |
Calculate tax on basic exemption limit + agriculture income i.e.
| Particulars | Amount (INR) |
|---|---|
| Tax on INR 2,50,000 | Nil |
| Tax on the second INR 2,50,000 @ 5% | 12,500 |
| Tax on remaining INR 50,000 @20% | 10,000 |
| Total Tax (B) | 22,500 |
The tax liability, in this case, will be INR 70,000 (a-b) i.e. INR 92,500 – INR 22,500
Section 54B: Capital Gain on Transfer of Land used for Agricultural Purpose
Section 54B of the Income Tax Act, 1961, is a provision that offers relief to individuals or Hindu Undivided Families (HUFs) who sell agricultural land and use the proceeds to purchase another agricultural land. Here are the key conditions to be eligible for this benefit:
- Eligibility: Only individuals or HUFs can claim this benefit.
- Usage for Agricultural Purposes: The agricultural land being sold and the one being purchased must be used specifically for agricultural activities.
- Previous Usage: The seller or their parents must have used the land for agricultural purposes for at least two years immediately preceding the date of sale. For HUFs, any member of the HUF must fulfill this criterion.
- Purchase Timeline: The new agricultural land must be purchased within two years from the date of sale. In case of compulsory acquisition, this period is calculated from the date of receipt of compensation.
- Utilization of Capital Gains: The entire amount of capital gains from the sale of agricultural land must be utilized for purchasing the new agricultural land. If not fully utilized, the remaining amount will be treated as capital gains and taxed accordingly.
- Holding Period: The new agricultural land cannot be sold within a period of three years from the date of its purchase to claim this benefit.
Which ITR is applicable for Agricultural Income
If the total agricultural income of the taxpayer is up to INR 5,000, it should be disclosed in the Income Tax Return (ITR) 1 form. However, if the agricultural income exceeds INR 5,000, then the taxpayer should use Form ITR 2.
Furthermore, if the income from agriculture surpasses INR 5 lakh, it must be reported separately for each agricultural land in the ‘exempt income schedule’. Additional details such as the district name with pin code, land measurement, ownership status (owned or leased), and irrigation status (irrigated or rain-fed) should also be provided. This ensures comprehensive reporting of agricultural income for taxation purposes.
Read More: Income Tax on Interest Income
Web Stories: Income Tax on Interest Income
Official Income Tax Return filing website: https://incometaxindia.gov.in/
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