Agricultural Income: Exemption Limit, Tax Calculation, Examples

Under the Income Tax Act, agricultural income includes rent or income from an agricultural land, earnings from agricultural activities, and income from buildings essential for carrying out agriculture. Agricultural income is exempted under the Income Tax Act, and there are certain conditions that must be met for the income to qualify for exemption.

Key Highlights

• Entire income from agriculture is exempt from tax.
• For tea, coffee and rubber cultivation, a fixed percentage of income is considered non-agricultural. 
• However, both agricultural and non-agricultural income is earned, the rule of partial integration is applied.

What is Agricultural Income?

As per the provisions of the Income-tax Act, agricultural land includes revenue from agricultural land and building, and income from agricultural activities. We can broadly classify the same into 3 categories:

1. Rent or revenue earned from agricultural land situated in India.
2. Income from agricultural land arising from primary agricultural activities and the sale of agricultural produce*.
3. Income from building required for agricultural operations.

Agricultural Activities and Sale of Agricultural Produce

1.  Basic operations: Cultivation of the land and consequently tilling of the land, sowing of seeds, planting and all such operations that require human skill and effort directly on the land.
2. Subsequent operations: Carried out for growth and preservation of the produce like weeding, digging soil around the crops grown etc. Also those operations which would make the product fit for use in the market like tending, pruning, cutting, harvesting, etc.
3. Processing the product to make it market-ready: Such processes involve manual or mechanical operations that are ordinarily employed to make the agricultural produce fit for the market and the original character of such produce is retained.
4. Sale of agricultural produce: Where the produce does not undergo ordinary processes employed to become marketable, the income arising on sale would generally be partly agricultural (exempt) income and part of it will be non-agricultural (taxable) income.

Note: 

• Income derived from saplings or seedlings grown in a nursery would also be considered to be agricultural income whether or not the basic operations were carried out on land.
• In cases where the activities have only some distant relation to land like dairy farming, breeding, rearing of livestock, poultry farming, etc. they do not form a part of agriculture income.

Income from Farm Building

The conditions for classifying income derived from farm building as agricultural income are as follows:

• The building should be on or in the surrounding area of the agricultural land.
•  Also, the rent receiver or cultivator of the land, by reason of his connection with the land, requires the building as a house to stay or as a storehouse or uses it for these kinds of situations
• Either of the two conditions should be satisfied:
  • The land is assessed by either land revenue or a local rate assessed and collected by government officers; OR
  • If the above condition is not satisfied, the land should be a rural agricultural land.

Agricultural and Non-Agricultural Income

The Income Tax has prescribed rules to make this bifurcation regarding agricultural and non-agricultural produce for products like tea, coffee, rubber, etc.

When there is both agricultural and non-agricultural income is earned by the taxpayer, the rule of partial integration is applicable.

Exclusions from Agricultural Income

We have seen above that agricultural income is exempt, whether it is received by the tiller or the landlord. However, non-agricultural income does not become agricultural merely on account of its indirect connection with the land. The following examples will illustrate the above point.

Example 1: A rural society has its principal business of selling butter which was made from the cream sold to them by farmers. The making of butter was a factory process separated from the farm. 

The butter resulting from the factory operations separated from the farm was not an agricultural product and the society was, therefore, not entitled to exemption under section 10(1) in respect of such income.

Example 2: X was the managing agent of a company. He was entitled to a commission at the rate of 10% p.a. on the annual net profits of the company. A part of the company’s income was agricultural income. X claimed that since his remuneration was calculated with reference to the income of the company, part of which was agricultural income, such part of the commission as was proportionate to the agricultural income was exempt from income tax. 

Since X received remuneration under a contract for personal service calculated on the amount of profits earned by the company; such remuneration does not constitute agricultural income.

Example 3: In regard to forest trees of spontaneous growth, which grow on the soil without any human skill and labour, there is no cultivation of the soil at all. Even though operations in the nature of forestry operations performed by the assessee may have the effect of nursing and fostering the growth of such forest trees, it cannot constitute agricultural operations.

Income from the sale of such forest trees of spontaneous growth does not, therefore, constitute agricultural income.

Examples of Agricultural Income

The following are some the examples of agricultural income:

• Income from the sale of seeds.
• Income from the sale of replanted trees.
• Interest on capital received by a partner from a firm engaged in agricultural operations.
• Income from growing flowers and creepers.
• Rent received for agricultural land.
• Profits received by a partner from a firm involved in agrarian produce or activities.
• Income from growing of bamboo.

Examples of Non-Agricultural Income

Below are some examples of non-agricultural income:

• Income from poultry farming.
• Income from agricultural land held as stock-in-trade
• Any dividend paid from an organization’s agriculture income.
• Income from dairy farming.
• Income from bee hiving.
• Income from fisheries.
• Income from cutting and selling timber trees.
• Income from butter and cheese making.
• Receipts from TV serial shooting in the farmhouse.

Taxation of Agricultural Income - Partial Integration

• As discussed above, agricultural income is exempt from income tax. However, the Income-tax Act has laid down a method to indirectly tax such income. 
• This method or concept may be called the partial integration of agricultural income with non-agricultural income. 
• It aims at taxing the non-agricultural income at higher rates of tax. 
• This method is applicable to individuals, HUFs, AOPs, BOIs, and artificial juridical persons, when the following conditions are met:
  • Net agricultural income is greater than Rs. 5,000 during the year; and
  • Non-agricultural income is above the basic exemption limit*

In simple terms, the non-agricultural income should be greater than the maximum amount not chargeable to tax (as per the slab rates).  Thus companies, firms/LLP, co-operative societies, and local authorities are excluded from using this method.

Basic exemption limit are as follows:

Step-by-Step Guide to calculate Tax using Partial Integration

Step 1: Calculate Tax on Nong Agricultural income + Net Agricultural Income ---(1)

Step 2: Calculate tax on Net-agricultural income+ Basic Exemption Limit ---(2)

Step 3: (1) - (2) is the tax on total income. Rebate, surcharge, cess will be adjusted as applicable.

Illustration

Income from other sources is Rs.7,00,000 and Net agriculture income Rs.2,00,000. The calculation of agriculture relief and net tax payable under the old tax regime is as follows

Total taxes on Rs.9,00,000 (Non-agricultural income + net agricultural income) = Rs.92,500 (before education cess @ 4%)

Total taxes on Rs.4,50,000 (Basic exemption limit + net agricultural income) = Rs.10,000 (before education cess @ 4%)

Net tax payable shall be Rs.82,500 (Rs.92,500 - Rs.10,000) + education cess @ 4%

Tax liability on agricultural income over and above the basic exemption limit shall be allowed as a relief. The higher the proportion of agriculture income in your total income higher the agriculture tax relief one can enjoy.

Which ITR to File for Agricultural Income?

Agricultural income is to be shown under the column of Agriculture Income in ITR-1. But ITR-1 applies only when the agricultural income is up to Rs 5,000. In case it exceeds the limit of Rs.5,000, ITR-2 form must be filed.

Tax Benefit Under Section 54B

Section 54B provides relief of capital gains to taxpayers who sell their agricultural land and acquire another agricultural land from the sale proceeds. The conditions for claiming the benefit u/s 54B are:

• The taxpayer should be an individual or HUF.
• The asset transferred should be agricultural land, whether a long-term or short-term capital asset. 
• The agricultural land should be used for agricultural purposes for at least two years immediately preceding the date of transfer of land.
• The taxpayer should acquire/purchase another agricultural land within two years from the transfer date.

The exemption amount under section 54B is the lower of the following:

• Amount of capital gains arising on transfer of agricultural land.
• Investment in a new agricultural land or the amount deposited in the Capital Gains Deposit Account Scheme.

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