Agricultural Income

Introduction:
The agricultural sector plays a crucial role in the economic perspective of any nation, both in developed and developing economies. As per Section 10(1) of the Income Tax Act, agricultural income is exempt from income tax and is not included in the total income while calculating tax liability. A larger part of our population still has agriculture as the primary and only source of income.

However, if a taxpayer has non-agricultural income along with agricultural income, the non-agricultural income is taxable according to the income tax slabs.

Agricultural Income as per Section 2(1A) of Income Tax Act:
Agricultural income means:

1. any rent or revenue derived from land which is situated in India and is used for agricultural purposes
2. Income by way of sale of agricultural produce (Note 1)
3. Rent from Building (used as dwelling or store house)

Note 1:
Agriculture is either basic or subsequent operations. Basic operations are cultivating the land, sowing of seeds, planting produce and all such activities. Subsequent operations would include activities like plucking, harvesting, digging etc.

Agricultural activities like performance of processes required to make the produce fit to be taken to market result in agricultural income.

Sale of such produce is also agricultural income.

All these above provisions are mentioned in Rule 7 of the Income Tax Rules. The Income Tax has prescribed rules to make this bifurcation regarding agricultural and non-agricultural produce for products like tea, coffee, rubber, etc. There are instances when a particular process is optional for sale of agricultural produce, then in such case we calculate the Agricultural income as well as the Income from business as the non-agriculture activity will be taxed as business.

Agriculture Income in such case shall be:-
Fair Market Value of such Agricultural produce after process
Less: Cost of such Produce
Income considered as Business Income will be:-
Sale value of Final Product
Less: FMV of such Agri produce
Less: Further process cost
Bifurcation of Agricultural and Non-agricultural Operaions for income considerations:

Operation	Agricultural Income	Non-agricultural Income
Growing and Manufacturing Tea	60%	40%
Manufacturing Rubber	65%	35%
Growing and curing Coffee	75%	25%
Coffee grown, cured, roasted, and grounded with or without mixing chicory or other flavouring ingredients	60%	40%

There are certain instances when a particular income is not considered as an Agricultural income:

1. Poultry Farming
2. Agriculture land held as stock-in-trade
3. Dividend paid from an organization’s agriculture income
4. Dairy farming, bee hiving and breeding of livestocks
5. Fisheries
6. Cutting and selling timber trees
7. Butter and Cheese making
8. Receipts from TV serial shooting in the farmhouse

Taxation of Agricultural Income:
Agricultural income is exempt from income tax u/s 10(1). However, in following cases agricultural income which is alongwith non-agricultural income will be partially taxed:

Applicable to individuals, HUFs, AOPs, BOIs, and artificial juridical persons, when :-

1. Net agricultural income is greater than Rs. 5,000 p.a.
2. Non-agricultural income is above the basic exemption limit

Calculation of Tax on such Agricultural Income:

Step 1: Compute Income Tax on Agriculture + Non-agriculture income as per prevailing tax rates without surcharge and cess

Step 2: Compute income tax on the total amount of basic exemption limit + agricultural income as per the prevailing income tax rates without surcharge and cess

Step 3: Step 1 – Step 2 will be the tax liability on agricultural income + any surcharge or cess

Reporting of Agricultural income in ITR:
In case Net Agricultural Income less than Rs.5,000 p.a. ITR – 1 Sahaj has to be filed. In all other cases, it is to be reported in ITR 2 Schedule EI.

Conclusion:
There will be a complete tax rebate on agriculture income in if:-

1. Net agricultural income is less than Rs. 5,000 p.a.;
2. Income from agricultural land is the only source of income, i.e., no other income like salary , HP etc;
3. Where you have both agricultural income and other income and if the total income excluding such agricultural income is less than the basic exemption limit.

in India, agricultural income is generally exempt from income tax under certain conditions, whereas in countries like the United States and the United Kingdom, agricultural income is typically subject to taxation, albeit with various deductions, exemptions, and credits available to farmers to mitigate their tax liabilities. However, with the help of partial integration, even certain part of agricultural income gets taxed in India as well. As per Union Budget 2023-24 the Ministry of Agriculture and Farmers Welfare, including Agricultural Education and Research, has been allocated approximately Rs. 1.25 lakh crores.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.