Agriculture Income Tax - Explained

The contribution of agriculture in the Indian economy is increasing over the time. Agriculture is the primary sector of the Indian economy and most of the rural population is dependant on agriculture.

Many taxpayers who earn a salary today also make a living through agriculture. Understanding agriculture's income and taxability is crucial since it affects so many people.

This document covers

What is Agriculture Income ?
Taxability of Agriculture Income
Examples of Agriculture Income
Examples of Non-Agriculture Income
Partial Integration of Agriculture income with Non-Agriculture Income
Steps for computation of Tax
Do I need to file income tax return if I only have agriculture income?
Details required to be reported in Income tax return.

1. What is Agriculture Income ?

The definition of agriculture income as per Income Tax Act is very wide. Agriculture income not only includes the income of the cultivators but also the land holders who are receiving rent. Agriculture income can be in the following ways.

Rent or revenue derived from land situated in India and used for agriculture purposes
Income derived from land by agriculture including processing of agricultural produce to render it fit for the market or sale of such produce
Income derived from any farm building required for agricultural operations.

2. Taxability of Agriculture Income

Agriculture Income is exempted from Income Tax u/s 10(1) of Income Tax act. Central Government has no power to levy tax on agriculture income

Note 1 : Rent or revenue from land situated outside India is taxable in India even though the land is used for agriculture purposes.

Note 2 : Any income from saplings or seedlings grown in a nursery will be treated as agriculture income and it is not taxable. Such Nursery should be maintained by carrying out the basic operations on land and subsequent operations.

For comprehensive understanding on capital gains when selling agricultural land, learn more at @ When to consider agriculture land as a capital asset?

3. Examples of Agriculture Income

The following are some of the examples of Agriculture income.

Income derived from sale of seeds.
Income from growing of bamboo.
Rent received for agriculture land situated in India.
Income from growing of flowers and creepers.

4. Examples of Non-Agriculture Income

The following are some of the examples of non-Agriculture income.

Income from breeding of livestock
Income from fisheries
Income from dairy farming
Receipt of rent for land used for Non-Agriculture purposes
Income from sale of forest trees of spontaneous growth

5. Partial Integration of Agriculture income with Non-Agriculture Income

5.1 What it means?: Even though the agriculture income is exempted from tax, a method has been laid down to impose taxes on agriculture income in indirect way. This concept is known as partial integration of agricultural income with non-agricultural income.

5.2 Applicability: This is applicable to individuals, HUF, AOP’s, BOI’s and Artificial Judicial persons.

5.3 Objective: The objective of partial integration is to tax the non-agriculture income at higher rates

5.4 Conditions: The following 2 conditions needs to be satisfied to apply the concept of partial integration

The net agricultural income should exceed Rs 5000 per annum
Non Agricultural income should exceed the basic exemption limits for the taxpayers ( 2.5 lakhs for taxpayers below 60 years age, 3 lakhs for above 60 and 5 lakhs for above 80)

6. Steps for computation of Tax

Add Non-Agriculture income with Net Agriculture income. Compute tax on the total amount
Add Net Agriculture income and the maximum basic exemption limit (Rs. 2.5 lakh / 3 lakh / 5 lakhs). Compute tax on the total amount
Deduct the amount calculated in Step B from the amount calculated in Step A i.e., A - B
Surcharge, education cess, rebate needs to be computed for the amount arrived in Step C

Example 1:

Mr Rama aged 40 years is a resident of India and he has a salary income of Rs 10 lakhs per annum. He also has agriculture income of Rs 3 lakhs, and he has spent Rs 50,000 towards expenses for agriculture land.

Answer: Generally people think that agriculture income is tax free but when you have taxable income, there is taxes on agriculture income also

Step A : Add Non-Agriculture income with Net Agriculture income. Compute tax on the total amount.

Non-Agriculture Income – Rs 10,00,000

Net Agriculture income(4,00,000 – 50,000) = Rs 3,50,000

Total Income – 10,00,000 + 3,50,000 = 13,50,000

Income Tax Under Old Regime = Rs. 2,17,500

Step B : Add Net Agriculture income and the maximum basic exemption limit. Compute tax on the total amount

Net Agriculture income (4,00,000 – 50,000) = Rs 3,50,000

Basic Exemption limit = Rs 2,50,000

Total Income - 3,50,000 + 2,50,000 = Rs 6,00,000

Income tax under Old Regime = 32500

Step C : Deduct the amount calculated in Step 2 from the amount calculated in Step 1 i.e., A-B

217500 – 32500 = Rs 185000

Step D : Surcharge, education cess, rebate needs to be computed for the amount arrived in Step C

Tax payable is 185000

Education cess @ 4% = 7400

Total tax is 192400

If agriculture income is not taxable, then Mr Rama needs to pay tax only on Rs 10 lakhs i.e, 117000 but as the partial integration is available, he is paying a tax of Rs 192400

Which ITR is required to be filed?

If the agriculture income is less than Rs 5000, you can use ITR 1 or ITR 4 depending on other sources of income like salary or business
If agriculture income is more than Rs 5000, You need to file under ITR 2 (if no business Income) or ITR 3 (business income)
Note: When filing with EZTax.in, the system automatically selects the ITR type automatically.

Related Help on Agricultural Income

7. Do I need to file income tax return if I only have agriculture income?

It is not mandatory to file agriculture income if you have only agriculture income. But it is good practice to file Income tax return as it helps in establishing financial identity over the years.