written by Khatabook | October 26, 2021

Overview Of Agricultural Income And Its Taxability

A large population of India is agriculture-dependent, and it occupies the top spot as a primary occupation being a significant income for a large number of households. The country itself depends on its agricultural farmers to meet its food requirements. It is an important sector since more production means self-sufficiency for food, lesser imports of food grains and better exports of non-essential agriculture items like fresh flowers, fruits, etc. The Government has a large number of promotional measures, policies and schemes for the agricultural sector. Farmers with agricultural income also get tax exemptions, and a rebate on agricultural income primarily encourages agriculture. Read on to know which taxpayers can avail of this benefit.

Meaning of Agricultural Income

What is agriculture income in the parlance of the 1961 Income-tax Act?  The Act defines agriculture income under three subheads of agricultural activities, which are described below:

1. Revenue from rentals as a form of agriculture income

Agricultural land can be used in several ways, and renting it out is one of them. Here, rent is paid to the owner by a tenant farmer to conduct agricultural activity on the land. Since time immemorial, this practice has been in place and is beneficial to both parties, tenant and owner. Thus, the income from agricultural land can take several forms, and the rentals accrued from it are just one of them. The sale of agricultural land and the income so derived is not considered agricultural income. To get agricultural income tax rebates, the agriculture income tax from such lands should accrue in the following ways.

2. Income from agricultural land

There are various ways to use the land to produce agricultural income and get tax exemptions. Agricultural income meaning and definition is not present in the Income Tax Act of 1961. Hence, the definition is derived from the Supreme Court hearing the case of CIT versus Raja Benoy Kumar Sahas Roy is adapted to explain the two kinds of agricultural operations that qualify and define it. They are:

a. Basic agricultural operations: The basic agricultural activity includes land cultivation through processes like land tilling, sowing of seeds, nurturing the land through composting or fallowing and planting of seeds, trees and crops. Such operations involve human effort and agricultural skills and require working directly on the land.

b. Subsequent agricultural operations: The following agricultural activities include the operations carried out to preserve and grow the agricultural produce like manuring, de-weeding, and loosening the soil for better growth. It also has operations like harvesting, pruning, tending, cutting, etc., which make the agricultural produce fit for consumption like packaging, marketing, etc.

So, is agricultural income taxable? Agricultural income includes the following activities for tax exemptions conditionally or non-conditionally:

i. Nursery and the income derived from providing seedlings or saplings. This means that a plant nursery provides agricultural income immaterial of the basic operations being carried out or not on the land.

ii. Through the tenant cultivator growing, farming and cultivating the land and paying the owner or receiver rent in terms of part of the agricultural produce fit for marketing as rent. Such agricultural processes are fully exempted from tax which involves mechanical and manual farming operations to make it fit for consumption or marketing while retaining its original character. For example, bagging, threshing of rice or wheat, etc.

iii. Through the sale of agricultural products where it does not undergo additional processing operations ordinarily employed to become marketable. For example, the selling of freshly plucked greens, vegetables, fruits etc. In such a case, the agricultural income is partly exempt as agricultural income and partially taxable as non-agricultural income.

In India, agriculture income is calculated by a set of rules that make the distinction and bifurcation of non-agricultural produce and agricultural produce. This is important to understand, especially in the case of crops like coffee, tea, rubber, etc.

Now, let us move on to agricultural income, where income from farm buildings in agricultural operations would be evaluated. 

Also Read: Salary Calculator 2020-21 - Take Home Salary Calculator India

3. Agricultural income tax income derived from agricultural operations in a farm building

The conditions that require being satisfied to term the income from conducting agricultural operations in a farm building as agricultural income eligible for tax exemption are given below.

  • The farm building should be on agricultural land or in its immediate neighbourhood. It should be acquired by the tenant cultivator and owned by the rent receiver. It's available as the cultivator’s agricultural land for leasing and using farm buildings as storehouses, residing places, etc.
  • One of the two below conditions should also be met. 
  • The land is assessed at the local rates or the land revenue department and tax collected on it by the government officers; OR 
  • The agricultural land location shall NOT be in the following regions when the above condition cannot be met.

Distance from municipality 

(Aerial distance)

Recorded last census population 

In 2 km range

10,000 – 1 lakh

In 6 km range

1-10 lakh

In 8 km range

More than 10 lakh

Note:

The term municipality here includes a notified area committee, Municipal Corporation, town committee, the town area committee and cantonment board.

Suppose the local population is less than 10,000, as recorded in the last census conducted. In that case, such agricultural land for tax exemption should not lie within the local jurisdiction of a cantonment board or the local municipality.

For activities that are case studies with a distant relation to use of the agricultural land as in the case of a gaushala, dairy farming, rearing of livestock, sheep breeding, poultry farming, and more, they are not considered for tax exemption as they are not a part of agriculture income.

Taxation of agricultural income

Now that we have understood what agricultural income means, let us move on to the agriculture income tax calculation of agricultural income and its nuances. We have learnt that only some forms of agricultural income are exempt from tax under the Income Tax Act of 1961. 

Let us now focus on how the Income-tax Act rules lay down the method or criteria to tax such income from agriculture indirectly. This conceptual method can also be arrived at using an agriculture income tax calculator and is also known as the partial integration of non-agricultural income and agricultural income. Its objective is to grant tax exemptions for agricultural income while indirectly taxing non-agricultural income at higher tax rates. 

Who can avail tax exemption?

The criteria below discusses who can avail tax exemptions for agricultural income and those having partly agricultural income like HUFs or Hindu undivided families, individuals, an association of persons (AOPs), the body of individuals (BOIs) and artificial entities or judicial persons are covered under this head. They must use the below criteria to calculate the agricultural income subject to taxation and the applicable exemptions. Note that firms, companies, limited liability partnerships (LLPs), the local authority and cooperative societies do not fall under this head. Hence, they are not to use this computational method to calculate agricultural income.

The computational tax slabs are:

When the portion of net agricultural income exceeds Rs. 5,000 per annum AND

Non-agricultural taxable income is:

  • More than Rs 2.50 lakh for individuals under 60 years of age and all other persons claiming applicability to tax exemptions.
  • More than Rs 3 lakh for individuals who are aged from 60 years to 80 years.
  • More than Rs 5 lakh for individuals over the age of 80 years.

In other terms, the non-agricultural income s hould be more than the maximum taxable amount not charged as per the above tax slab rates to apply for tax exemptions on agricultural income. This implies that those who exist only on agricultural income are exempt from tax. 

How to calculate agricultural Income?

Use the tax calculation on the agricultural income diagram below to compute your taxes.

  • Firstly, you must calculate the taxable income in agricultural income tax calculation as the net agricultural income plus the non-agricultural income. 
  • Check if it fits the criteria for tax-exemptions as discussed in the method in the previous paragraphs. 
  • Next, calculate your tax based on the existing tax rates under the Income Tax Act of 1961. 
  • Now, calculate the final taxes as the difference between the two values arrived at above. 
  • Finally, deduct the available rebates and add Educational Cess and surcharge to arrive at the final tax payable.

Which Income Tax Returns (ITR) should I fill for claiming tax exemption under agricultural income?

There are seven ITR forms. These may apply to different kinds of persons. ITR-1 or Sugam and ITR-4 are applicable for individuals with agricultural income less than Rs 5000/-.  

Refer to the chart below:

ITR Form

Applies to

Salary

Own House 

Business Income

Capital Gains

Other

Exempt Income

Asset abroad

Losses C/F

ITR 1 / Sahaj

Individual, HUF (Residents)

Yes

Yes(One House Property)

No

No

Yes

Yes (Agricultural Income less than Rs 5,000)

No

No

ITR 2

Individual, HUF

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

ITR 3

Individual or HUF, a partner in a Firm

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

ITR 4

Individual, HUF, Firm

Yes

Yes(One House Property)

Presumptive Business Income

No

Yes

Yes (Agricultural Income less than Rs 5,000)

No

No

ITR 5

Partnership Firm/ LLP

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

ITR 6

Company

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

ITR 7

Trust

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Also Read: How to Claim Relief Under Section 89(1) On Salary Arrears

Conclusion

Agricultural income is at best to be considered a conditional tax. The government tries to encourage farmers through sops like tax exemption. However, not all kinds of agricultural income are tax-exempt, and even farmers are required to file their income tax returns to claim tax exemption. The filing of income tax returns can be very confusing to most people. Are you having issues with tax compliance and the agriculture income ITR form? An easy solution to such issues would be downloading the Khatabook app to your phone and learning more about this.

FAQs

Q: Do farmers have to file ITR?

Ans:

If the assessee has an aggregate agricultural income less than Rs 5000/-, they should use ITR-1. If the income under this head is greater than Rs 5,000/-, they should use ITR-2.

Q: Can I apply for tax exemption under the agriculture income head if I grow tea in Coorg?

Ans:

Yes. In this case, 40% of the income is subject to tax, considering it as business income and the remaining balance is treated as tax-exempt agricultural income.

Q: Why should I file Income Tax Returns?

Ans:

You should file Income Tax Returns (ITR) if:

1. You wish to claim a tax rebate for agricultural income, refunds on the various sections of the IT Act etc.

2. You have invested and earned from foreign assets in that Assessment Year (AY).

3. You are applying for a loan or visa.

4. If the entity is a firm or company with a profit or loss.

You must also mandatorily file ITR if you meet one of the below-mentioned primary conditions. (Even when your taxable income is below the exemption limits).  

  1. Have made deposits totalling Rs.1 Cr and above in one or many current bank accounts.
  2. Have a total expenditure of above Rs 2 lakh when you or dependents travel abroad.
  3. Have an electric bill of Rs.1 lakh in the AY.

Q: Is all agricultural income free, or is there a limit on the tax exemptions?

Ans:

As per the latest amendment, the agricultural income, less than Rs 5,000/- in an FY, is completely tax exempt. Over and above this tax limit, the agricultural income is taxable as per the slab applicable. However, the rules are conditional, and a complete understanding of agricultural income taxation will be essential.

Q: I am an Indian and have agricultural income from lands in Nepal. Is it tax-exempt?

Ans:

No. The agriculture income eligible for tax exemption should be in India. Hence the tax exemption does not apply to you though you are an Indian.

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