Dr.
Shannu NARAYAN
PGP – FinTax Batch
Session 3
Taxation of Agricultural Income
Income-tax Act defines “agricultural income” as 3 main
activities:
Rent or revenue got from agricultural land situated in India:
Income derived from agricultural land through two types of
operations –
basic operations and subsequent operations.
performance of a process by the cultivator or the receiver of
rent leading to such produce being fit to be taken to the
market
sale of such agricultural produce.
The Income Tax has prescribed rules to make this bifurcation regarding
agricultural and non agricultural produce for products like tea, coffee,
rubber, etc.
Income derived from farm building required for agricultural
operations:
What does agriculture include?
Horticulture, floriculture, arboriculture and sylviculture
Raising of grooves, plantations, raising of grass or pastures.
Would extend to cultivation of all commodities if food
value like sugarcane, coffee, mangoes, etc.
Artistic and decorative value like flowers and creepers,
housing value like bamboo, timber, fuel value, medicinal
and health value. However, cover only those incomes which
are derived by human effort.
Partial integration of AI
with non-AI
Non-agricultural income to be taxed at higher rates
Individuals, HUFs, AOPs, BOIs and artificial juridical persons
Company, firm/LLP, co-operative society and local authority are
excluded from this method
Net agricultural income is greater than Rs. 5,000 during the year;
and
Non-agricultural income is:
Greater than Rs. 2,50,000 for individuals below 60 years of age and all
other applicable persons
Greater than Rs. 3,00,000 for individuals between 60 – 80 years of age
Greater than Rs. 5,00,000 for individuals above 80 years of age
In simple terms, the non-agricultural income should be greater
than the maximum amount not chargeable to tax (as per the slab
rates).
Logic behind exemption
Illogical to collect taxes from its own organization
No justification for taxing organizations working for non-
profit
Income not included in Total Income:
State owned institutions that are mentioned by names
Institutions of Social relevance – with objectives to relief,
development of education or research
Privilege by State – Any award or reward by Central/State
Govt. in public interest
Agricultural income
Retirement benefits – as a gratitude
Contd..
S.10A – exemption in respect of income of newly established
undertakings in free trade zone or electronic hardware technology
park or electronic software technology park
S. 10AA – exemption in respect of income of newly established units
in Special Economic Zones
- any undertaking, being the Unit, which fulfils all the following
conditions, namely:
(i) it has begun or begins to manufacture or produce articles or things
or provide services during the previous year relevant to the assessment
year commencing on or after the 1st day of April, 2006 in any Special
Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a
business already in existence:
(iii) it is not formed by the transfer to a new business, of machinery
plant previously used for any purpose.
Deduction
(i) 100% of profits and gains derived from the export - for a
period of five consecutive assessment years beginning with
the AY relevant to the PY in which the Unit
(ii) 50% of such profits and gains for further five
assessment years and thereafter;
(ii) for the next five consecutive assessment years, so much
of the amount not exceeding 50% of the profit as debited to
P & L account of the previous year in respect of which the
deduction is to be allowed and credited to a reserve
account (to be called the “Special Economic Zone Re-
investment Reserve Account”)
Heads of Income (S.2(24))
There are five heads of Income:
Income from Salary
Income from House Property
Income from Profits and gains of business or
profession
Income from Capital gains
Income from Other Sources
Salary (S.15-17)
Chargeability - Deduction – Constituents of Salary
For computation of salary:
Employer-employee relationship is a must
Example: Manager : Remuneration received by a
manager of a company even if he is wrongly designated
as a director or by any other name would be chargeable
to tax under this head regardless of the fact that the
amount is payable to him monthly or is calculated at a
certain percentage of the company’s pro ts.
Basis of Charge
Salary is taxable on “due” or “paid” basis
If it is due, it is included in taxable salary, irrespective
of whether it is paid or not, and if it is paid, it is
taxable, irrespective of whether it is due or not.
Advance salary is taxable; however, an Advance against
Salary is essentially a loan which will be recovered later
from the Employee and therefore that is n’t taxable.
Salary, if earned in India, is deemed to accrue / arise in
India, even if it is paid outside India
Salary
Includes wages, allowances, annuity, pension, gratuity,
fees, commission, advance, leave encashment and also
perquisites and profits in lieu of salary
Allowances
Fully Taxable Fully Exempt
Partly Taxable
(Entertainment, (Allowances to
(HRA u/s
Dearness, HC/ SC Judges &
10(13A) &
Overtime, City to Govt.
Special
Compensatory, Employees
Allowances u/s
Servant, Meal outside India)
10(14) included)
Allowances)
HRA
House Rent Allowance
HRA received by any employee is exempt to the extent of
least of the following:
– 50% of Salary for Metro Cities (Delhi, Mumbai,
Kolkata and Chennai), else 40% of Salary
– HRA actually received
– Rent paid minus 10% of Salary
Annuity
Yearly payment to an employee post his retirement –
funds saved by him through annuity fund vide his
salary – during employment.
When received from the present employer is
chargeable to tax as Salary and
When received from the past employer is chargeable to
tax as Profits In lieu of Salary.
Pension
Paid by the Government or a Company to the
employee for his past service – paid after the
retirement.
Pension
(when received in lumpsum
in one time)
Non-Govt. Employee, the pension
Employees of Central Government, Local
amount shall be exempt from tax to
Authorities, Defence Services etc
extent of
1⁄2 of the amount of
1/3rd of the amount of
pension (if the Employee
Fully exempt pension (if the Employee is
is not in receipt of
in receipt of Gratuity too)
Gratuity)
Gratuity
Governed by Payment of Gratuity Act (PGA), 1972
amended in 2018
It is voluntary payment by employer in lieu of the
long-term service of an employee (usually > 5 years),
Salary means Basic Pay + DA
Gratuity
Central / State Government Non-Govt.
employees and for the Non-Govt. Employee Employee (Not
members of the Defence (Covered by PGA) Covered by PGA)
Services
1. INR 20 Lakhs 1. INR 20 Lakhs
Fully
2. Gratuity actually received 2. Gratuity actually received
exempt
3. 15 days’ Salary based on 3. Half months’ Salary based on last 10
salary last drawn for each months’ average salary drawn
year of service or part immediately preceding the month of
thereof in excess of 6 months retirement / death, for each completed
year of service
Leave Encashment Salary
LES
Central Non-Govt.
Government Employee
employees
1. INR 3 Lakhs
Fully exempt
2. Leave Salary actually received
3. 10 month’s Salary on the basis of average Salary drawn
in the last 10 months
4. Cash Equivalent of Leave standing to the credit of the
employee at the time of retirement / death, based on last
10 month’s average salary drawn. Earned leave
entitlement per year cannot exceed 30.
