Taxation of Agricultural Income

1.Definition of agricultural Income:

  • Any rent or revenue derived from agricultural land
  • Any Income derived from such land by-
    • i) agriculture, or
    • ii) processing of agricultural produce, or
    • iii) sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him.
  • Income derived from building on agricultural land.
  • Notes:
    • i) The building should be on or in the immediate vicinity of the land
    • ii) The building is used by the cultivator or receiver of rent as a dwelling house, or as a store house, or other out building.
    • iii) Land should not fall in definition of capital asset i.e. it should be agricultural land situated in rural area.
  • Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

 2. Section 10: Agricultural income exempt from tax

  • Agricultural income is exempt from tax under section 10.
  • However, for computation of income tax, agricultural income is aggregated with non-agricultural income if:
    • I) Assessee is an individual, HUF, AOP/BOI (taxable at normal rates applicable to an individual).
    • II) Assessee has non-agricultural income which exceeds the taxable limit.
    • III) Agricultural income exceeds Rs. 5,000.

 3. Aggregation of agricultural income with non-agricultural income and computation of income tax

  • Step 1: Net agricultural income to be computed as if it were income chargeable to income tax. In case of an assessee engaged in business of growing and manufacturing tea, 60% of income computed is agricultural income.
  • Step 2: Aggregate agricultural income and non-agricultural income of assessee and calculate income tax on average income as if such aggregate income were the total income.
  • Step3: Increase the net agricultural income by the first slab of income on which tax is charged at nil rate i.e. for AY 2018-19/ 2019-20, income is to be increased by:
  • In case of Income to be increased by
    Resident senior citizen (> 60 years, <80 years) Rs. 3,00,000
    Super- senior resident individual (80 years or more) Rs. 5,00,000
    Any other individual/ Every HUF Rs. 2,50,000

    Income- tax is calculated on net agricultural income, so increased, as if such income were the total income of the assessee.

  • Step 4: Reduce the amount of income tax determined at Step 2 by the amount of income tax determined under Step 3.
  • Step 5: Calculate the balance. Add education cess and secondary and higher education cess.
  • Step 6: Amount so arrived is the income tax payable by the assessee.