In India, the value of agriculture has been on the rise for centuries as it has given individuals health, wealth and a standard of living. Agriculture and the related sector majorly contribute to the economy’s overall development, especially in India. Hence, the government also pushes the growth of the sector with the help of favourable policies, schemes, and exemptions in income tax for income generated from agricultural activities. In the below article, we’ll delve into agriculture income, its types, agricultural income tax and calculation.
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 states the definition of agricultural income includes
- Renting/leasing agricultural land for agriculture, storeroom, residential place and outhouse.
- Money earned from trees growing in nurseries as seedlings or saplings.
- Renting/leasing agricultural land by cultivator or farmer.
- Any income due to 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.
Are These Income Agricultural or Not?
|Income generated from sales of seeds
|Income from the dairy industry
|Rent received from agricultural land
|Earnings from bee hives
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.
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 base of age.
How to Calculate Tax Liability of Agricultural Income?
The Government of India has exempted agriculture 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 below 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 + maximum set exemption limit as per 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 step 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.
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.
Are farmers exempted from income tax?
In India, farmers are exempted from paying income tax to the central government as per the Income Tax Act 1961.
What are the types of agricultural income?
The agricultural income sale of seeds and revenue generated from the sale of replanted trees. In addition, the interest on the capital amount a partner receives from a company or firm engaged in agricultural operations also comes under agricultural income.
Is all agricultural income exempt from paying taxes?
Agriculture income is exempt from taxation if it meets either of the following two criteria. Net agricultural income is under ₹5,000, and the total income, with the exception of income from agriculture, is below the threshold for basic exemption.
Is income from the sale of milk taxable?
Yes, Income tax is payable on such kind of activity as it is not covered under agricultural activity. It will be treated as business income.
Is Income generated from growing tea considered agricultural Income?
When it comes to the tea business, 40% of the total earnings is assumed as business income and taxable. While the remaining 60% is considered agricultural income and is exempted from tax.
Is Income generated by the resident of India from land situated in Nepal exempted from tax?
No, the individual will have to pay tax on the revenue as only agricultural income generated from land situated in India is exempted from taxes.
What if the agricultural operation is done on urban land?
All the operations are exempted from tax done on either urban or rural land.