EN
Agriculture has always played a major role in India’s growth. It supports livelihoods, improves living standards, and contributes strongly to the country’s economy. Because of its importance, the government encourages this sector through helpful schemes, policies, and tax benefits on farm-related earnings. In this article, we explain what agricultural income means, the different types of such income, how it is taxed, and how the tax is calculated, all in a simple and easy-to-understand way.
Key Takeaways
- Agricultural income comes from farming, land rent, nurseries, and related natural activities.
- Some earnings, like heavily processed goods or timber sales, are not treated as agricultural income.
- Agricultural income is tax-free at the central level but taxed by states under certain rules.
- Partial integration is used to calculate tax when both farm and non-farm incomes exist.
What is Agriculture Income?
The revenue generated from activities such as farming, cattle feeding, fishing and other activities is primarily known as agricultural income.
Section 2 (1A) of the Income Tax Act defines agricultural income as:
- Renting/leasing agricultural land for agriculture, a storeroom, a residential place and an outhouse.
- Money earned from trees growing in nurseries as seedlings or saplings.
- Renting/leasing agricultural land by a cultivator or farmer.
- Any income due to the commercial use of agricultural land.
- The agricultural land, or the land where the building is located, is being assessed for land revenue or subject to a local rate.
However, the following income sources have been excluded from the agriculture income definition.
- Revenue is generated from the sale of processed produce without actual agricultural activity.
- Income earned from extremely processed produce.
- Revenue derived from trees sold as timber.
Read More About: The Income Tax Act, 1961
Are These Income Agricultural or Not?
| Income generated from sales of seeds | Yes |
| Income from the dairy industry | No |
| Rent received from agricultural land | Yes |
| Earnings from bee hives | No |
What are the Types of Agricultural Income?
As per the Income Tax Act, agricultural income has been classified into 3 categories.
- Agricultural land: The income generated from farming activities such as growing crops, fruits, vegetables, and other agricultural products. The purview of this category includes income from selling livestock, dairy products, and poultry.
- Agricultural business: This category includes profits generated from agricultural processing and manufacturing activities like sugar, textiles, jute, and other agricultural products.
- Agricultural rent: The rental income derived by the owner from renting out the land to farmers for cultivation purposes.
Read More About: Ultimate Guide to Income Tax
Examples of Agricultural Income
- Sale of crops: Money earned from selling crops like wheat, rice, vegetables, fruits, and pulses. These are grown directly on agricultural land.
- Plantation and garden produce: Income from items such as flowers, coconut, nursery plants, and tea leaves. These qualify when grown and sold under farm-related rules.
- Rent from farmland: Rent received by leasing agricultural land for cultivation. This is treated as farm income if conditions are met.
- Basic processing of crops: Earnings from simple activities like cleaning, drying, or packing produce. These are done only to make crops ready for sale.
- Farm buildings: Rent from farmhouses or storage sheds used for farming needs. This is counted when the building supports agricultural work.
What is the Income Tax on Agricultural Income?
In short, agricultural income is taxed at two levels, i.e. Central Level and the State Level.
Central Government: As per Section 10(1) of the Income Tax Act, 1961, the Central Government of India has exempted the income tax on agricultural income. This indicates that at the central level, agricultural income is not exposed to any kind of income tax.
State Government: When it comes to the state level, the agricultural income of over ₹5,000 is subject to tax. The state uses partial integration of agricultural income with non-agricultural income to tax such kinds of earnings.
- Net agricultural income was more than ₹5,000 in the previous financial year.
- Total income, minus this net agricultural income, is higher than the exemption limit per the specified category on the basis of age.
How to Calculate Tax Liability of Agricultural Income?
The Government of India has exempted agricultural income from the purview of income tax. It partially integrates agricultural and non-agricultural income with the above-mentioned conditions.
However, if an individual and entity satisfy the above criteria, the agriculture income tax is calculated through the following three-step process:
Step 1: First, evaluate tax liability on non-agricultural income + net agricultural income.
Step 2: Now, calculate tax on net agricultural income + the maximum set exemption limit as per the applicable tax slab.
Step 3: The final step is to compute the tax amount by determining the difference between the amounts of steps 1 and 2. This step provides the following information:
- Deduction of a tax rebate, if available.
- Addition of a surcharge, if applicable.
- Addition of the Health and Education Cess.
Other Pointers to Keep in Mind:
As per section 54B of the Income Tax Act, 1961, tax relief is provided to an entity or individual if they sell their owned agricultural land and use the amount they receive after selling to acquire another piece of land.
However, you must fulfil the following criteria to claim the benefit under section 54B.
- The benefit-claiming entity can only be an individual or a Hindu Undivided Family (HUF).
- The individual or their parents should have used the agricultural land for at least two years before the date of selling. For HUFs, the land should have been used by a member.
- The individual or the HUF must purchase another agricultural land within two years of selling the last one.
Agricultural Vs Non-Agricultural Income
Many people think that anything related to farming automatically counts as agricultural income, but this is not always true. The main difference depends on where the income comes from and what kind of work is involved.
Agricultural income is earned directly from agricultural land in India. It includes activities linked to cultivation, such as growing crops and doing simple work to make them ready for sale. Examples include selling crops, earning rent from farmland, and basic processing like drying or grading done by the farmer.
Non-agricultural income comes from business or commercial activities. This includes running food factories, trading farm goods, or earning from dairy and poultry.
A simple rule: if the income comes from farming land, it is agricultural income. If it comes from running a business around farm products, it is not.
Conclusion
Agriculture and related activities are one of the most important foundations for economic development. The government also focuses on the sector's growth by pushing low-rate finances, subsidies, etc. The income generated from those activities is exempted at the central government level but taxed at the state government level with some regulations.
