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Agricultural Income – Tax treatment /

Taxability
Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes
on agricultural income to the State Legislature. However while computing tax on non-agricultural
income agricultural income is also taken into consideration.

Introduction:

Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the
Income Tax Act, 1961. Agricultural income is defined under section 2(1A) of the
Income-tax Act.

As per section 2(1A), agricultural income generally means

(a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.

(b) Any income derived from such land by agriculture operations including processing
of agricultural produce so as to render it fit for the market or sale of such produce.

(c) Any income attributable to a farm house subject to satisfaction of certain conditions
specified in this regard in section 2(1A).

(d) Any income derived from saplings or seedlings grown in a nursery shall be deemed
to be agricultural income.

Meaning of Agricultural Income:

Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as an income
under the following three sources:

(i) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes: The assessee will not be liable to pay tax on the rent or revenue
arising from agricultural land subject to the conditions:
(ii) Any income derived from such land by agricultural operations including processing
of agricultural produce, raised or received as rent in kind or any process ordinarily
employed by cultivator or receiver of rent-in-kind so as to render it fit for the market,
or sale of such produce.

(iii) Any income derived from any building owned and occupied by the assessee, receiving
rent or revenue from the land, by carrying out agricultural operations: The building must
be on or in the immediate vicinity of the land. It must be used by the assesee as a
dwelling house or store-house or an out-building, in connection with the land.

Hence, we can consider income attributable to a farmhouse as an agricultural income,

subject to the above conditions. Normally, the annual value of a building is taxable as
‘income from house property’. However, in the case of a farm house, the annual value
would be deemed agricultural income and thus, be exempt from tax.

)In addition to the above, income derived from saplings or seedlings grown in nursery is
also considered as agricultural income.

ESSENTIAL FEATURES OF AGRICULTURAL INCOME

(I)Existence of a land in India :

Agricultural income derived from land situated in foreign countries will not be
regarded as agricultural income and it will not be exempt from income tax hence it is
necessary that land must be situated in India for claiming exemption from income tax.

(ii) Usage of land for agricultural operations:

Agricultural operations means efforts induced for the crop to sprout out of the land.
The ambit of agricultural income covers income from agricultural operations, which
includes processes undertaken to make the produce fit for sale in the market. Both, rent
or revenue from the agricultural land and income earned by the cultivator or receiver
by way of sale of produce are exempt from tax only if agricultural operations are
performed on the land.

(iii) Cultivation of Land is a must:

Some measure of cultivation is necessary for land to have been used for agricultural
purposes. The ambit of agriculture covers all land produce like grain, fruits, tea, coffee,
spices, commercial crops, plantations, groves, and grasslands. However, the breeding of
livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot
be construed as agricultural operations.

(iv) Ownership of Land is not essential:

In the case of rent or revenue, it is essential that the assessee has an interest in the land
(as an owner or a mortgagee) to be eligible for tax-free income. However, in the case of
agricultural operations, it is not necessary that the cultivator be the owner of the land.
He could be a tenant or a sub-tenant. In other words, all tillers of land are agriculturists
and enjoy exemption from tax. In certain cases, further processes may be necessary to
make a commodity marketable out of agricultural produce. The sales proceeds in such
cases are considered agricultural income because the producer’s final objective is to sell
his products.

Note:

a. Agricultural income is considered for rate purpose while computing the tax liability
for Individual/HUF/AOP/BOI/Artificial Judicial Person.

b. Losses from agricultural operations could be carried forward and set off with
agricultural income for the next eight assessment years.

c. Agriculture income is computed in a manner similar to business income.

Exceptions:

a. If a person sells processed produce without carrying out any agricultural or

processing operations, the income would not be regarded as agricultural income.

b. Likewise, in cases where the produce is subjected to substantial processing which

changes the very nature of the product (for instance, canning of fruits), the entire
operation is not considered as an agricultural operation. The profit from the sale of
such processed products will have to be apportioned between agricultural income and
business income.

c. Income from trees that have been cut and sold as timber is not considered as an
agricultural income since there is no active involvement in operations like cultivation
and soil treatment.

SOME EXAMPLES OF AGRICULTURAL INCOME

(i) Income from growing flowers and creepers

(ii) Compensation received from insurance company for damages to the green
leaf forming part of assessee ‘s tea garden.
(iii) Interest on capital received by a partner from the firm engaged in
agricultural operation is also treated as agricultural income.
(iv) Income derived by growing special quality of grass required for creating
goals court is agricultural income.
(v) Lease rent received from leasing land for grazing of cattle required for
agricultural purpose is agricultural income.
(vi) Compensation received for being kept out of agricultural land
(vii) Share of profit or salary or interest on capital received by a partner from A
firm engaged in agricultural operations
(viii) Income from running nursery on own land by the assessee shall be deemed as
agricultural income
(ix) Ownership of land is not a prerequisite for having agricultural income. It is
sufficient that the income is derived from agricultural activities carried out
on an agricultural land situated in India
 (x) Income derived from the sale of seeds is an agricultural income as the seeds
of its existence from the mother plant which is grown on land.

NON- AGRICULTURAL INCOME

The following incomes do related with land and seems like every cultural income and
not treated as agricultural income since these are the basic essential features of
agricultural income.

(i) Income arising from sale of wild grass, and trees or plants which have grown
spontaneously.
(ii) Income from supply of water for irrigation
(iii) Income from plants used for brick making
(iv) Income for royalty from mining or stone queries
(v) Income from producing water fruits in a tank
(vi) Commission received by a landowner on the sale of agricultural produce of
his tenant.
(vii) Compensation for acquisition of land for military use.
(viii) Income from hiring the assessee is garden or farmhouse for shooting of a film
is not agricultural income.
(ix) Income from farm house which is used for non agriculture purpose including
letting for residential purpose or for the purpose of any business or
profession.
(x) Interest received money lender in the form of agricultural produce is also
non-agricultural income.
(xi) Dividend received from a company engaged in agricultural activities.
(xii) Income to the purchase of standing crop arising on selling it.

PARTLY AGRICULTURAL INCOME

Sometimes, income comprises of both agricultural as well as

non-agricultural income. Such a situation arises in case of
certain ‘Agro based industries where agricultural produce is
used as raw material and it (i.e., raw material) is produced
by the same person (i.e., industrialist) who manufactures
industrial product by using such raw material. Such
industries (i.e., persons), earn income by selling the
industrial product manufactured from self grown agricultural
raw material.

1. Profits of sugar mills and other industries: income of a

sugar medicine which produces sugar from the
sugarcane grown on its own land is partly agricultural
and partly non agricultural income. In this case the
market value of agricultural produced is determined as
non agricultural income of concern.
 2. Income from manufacture of rubber: any income
derived from the sale of centrifuged latex obtained
from rubber plants grown by the seller in India shall be
computed as if it were income derived from business
and 35% of such income Shelby game to be income
liable to tax where are 65% of such income is treated as
agricultural income.
3. Income from manufacture of coffee: the following
provisions apply with regard to the income from
manufacture of coffee:

 Income derived from sale of coffee grown or cured

by the seller in India shall be treated as 75%
agricultural income and 25% business income.
 Income derived from sale of coffee grown cured
roasted and grounded by the seller in India shall
we treated as 60% agricultural income and 40%
business income.

4. Income from the manufacture of tea : income

derived from the sale of tea grown and
manufactured by the seller in India shall be
computed as if it were income derived from
business. In this case 60% of the agricultural income
is treated as agricultural income and 40% is treated
as non agricultural income.

TAXABILITY OF AGRICULTURAL INCOME

Agricultural income is considered for rate purposes while computing the income tax
liability, if following two conditions are cumulatively satisfied:

i. Net Agricultural income exceeds Rs. 5,000/- for previous year, and

ii. Total income, excluding net Agricultural income, exceeds the basic exemption limit.

Note: If aggregate agricultural income of the assessee is up to Rs. 5,000/- during FY

2018, then the entire income shall be exempt from tax. Accordingly, you need to disclose
the agricultural income in the income tax return (ITR) 1 form to be compliant from the
disclosure perspective. But if the agricultural income exceeds Rs.5,000, then form ITR 2
applies, which has a separate column for disclosure of agricultural income.
Once the aforementioned conditions are satisfied then we shall compute the Tax liability
in the following manner:

♠ First, include the Agricultural income while computing your income Tax liability.

Example – Let us say that an Individual Assessee has a Total income of INR 7,50,000/-
(excluding Agricultural income) and a Net Agricultural income of INR 100,000/-. Then,
per this step, Tax shall be computed on INR 7,50,000/- + INR 1,00,000/- = INR
8,50,000/-. Thus, income Tax amount as per this step shall be INR 82500/- for an
individual who is below the age of 60 Years during the P.Y. 2017-18.

♠ Second, add the applicable basic tax slab benefit, as applicable, to the Net
Agricultural income. Thus, per our example mentioned above we shall add INR
2,50,000/- to INR 1,00,000/- as the applicable Tax slab benefit available to an individual
below 60 Years of age is INR 2,50,000/-. Now we will compute income Tax on INR
3,50,000/- (Tax slab benefit 2,50,000 + Net Agricultural income 1,00,000). The amount of
Tax shall be INR 5000/-.

♠ Third, subtract the Tax computed in Second step from the Tax computed in First step =
INR 77,500/-. Thus, this is the income Tax liability subject to deductions, Education
Cess etc., as applicable.

This process of computation is, however, followed only if the assessee’s non-agricultural
income is in excess of the basic exemption slab.