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Union Budget 2023 Highlights:

  • No taxes up to Rs 7 Lakhs annual income under the new tax regime
  • The surcharge rate is reduced from 37% to 25%
  • Standard deduction of Rs 52,500 for Rs 15.5 Lakhs or more Income Slabs
  • Increase in CAPEX to Rs 10 Lakh crores, 33% higher compared to 2022-23
  • Tax hiked on Cigarettes by 16%
  • Railways get a big chunk in Budget 2023-24, an allocation of Rs. 2.4 Lakhs crores capital
  • One-time Small Savings Scheme, ‘Mahila Samman Savings Certificate’ is introduced to encourage women to start investing; available for only 2 years
  • ‘Senior Citizen Saving Scheme’ limit increased from 15 lakhs to 30 Lakhs
  • The TDS Rate was reduced to 20% from the current 30% on taxable withdrawal of EPF for people without PAN
  • New Income Tax Regime is now the default for taxpayers, while the old regime is optional
Click here to delve into the main highlights of Union Budget 2023-24.

Agricultural Income – Taxability & Treatment

Updated on: 03 Feb, 2023 03:50 PM

Today, agriculture plays a vital role in India’s economy and over 50% of India’s workforce is engaged in agricultural activities. From the surface, it appears that agricultural income is exempt from income tax, but it’s not as easy as it appears. Let’s get into the details of agricultural income and its taxation!

Important: e-verify your income tax return within 30 days, else your return will be considered as not filed.

What is the taxability of agricultural income in India?

As per Section 10 (1), any income derived from the agricultural land shall not be included in Total Taxable Income.

What is an agricultural income in India?

As per Section 2 (1A) of the Income Tax Act, agricultural income can be defined as follows:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

(b) Any income derived from such land by agriculture operations including processing of agricultural produce to render it fit for the market or sale of such produce.

(c) Any income attributable to a farmhouse subject to satisfaction of certain conditions specified in this regard in section 2(1A). Also, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

How much agricultural income is exempt from income tax?

There is a complete tax rebate on agriculture income in these cases

  1. If your total agricultural income is less than Rs. 5,000;
  2. If the income from agricultural land is your only source of income i.e. no other income;
  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.

But, in case, your agricultural income exceeds Rs. 5,000 and you have other sources of income too, then the tax liability for that year is to be calculated as:

  1. Compute income tax on the aggregate income (i.e. agricultural income + other income) as per the prevailing income tax rates.
  2. Compute income tax on the sum of the amount of basic exemption limit plus agricultural income as per the prevailing income tax rates.
  3. Now, Compute (1) – (2) to arrive at the tax liability for the year.

How to calculate tax on agriculture income for AY 2019-20?

Suppose, you earn Rs. 4,00,000/- as salary income and Rs. 90,000/- as agricultural income for the assessment year 2021-22

The computation shall be as follows:
a. Calculate tax on total income of Rs 4,90,000

Particulars Amount
Tax on Rs 2,50,000 Nil
Tax on remaining Rs 2,40,000 @ 5% 12,000
Total Tax 12,000

b. Calculate tax on basic exemption limit + agricultural income:

Particulars Amount
Tax on Rs 2,50,000 Nil
Tax on remaining Rs 90,000 @ 5% 4,500
Total Tax 4,500*

The tax liability, in this case, shall be Rs. 7,500 (a-b) i.e. Rs 12,000 – Rs 4,500 and there’s no extra tax payable owing to the extra income of agriculture.

*Please note that Rebate u/s 87A, surcharge , Cess will be applicable in addition to the tax calculated. Standard deduction of Rs. 50000 has not been considered in the example.

But, you might have to pay some tax on agriculture income in certain cases.

Say, you’ve earned salary income of Rs 500000 and agricultural income of Rs 500000 during the A.Y. 2021-22

a. Calculate tax on total income of Rs 10,00,000

Particulars Amount
Tax on Rs 2,50,000 Nil
Tax on next Rs 2,50,000 @ 5% 12,500
Tax on remaining Rs 5,00,000 @ 20% 100000
Total Tax 112500

b. Calculate tax on basic exemption limit + agricultural income i.e.

Particulars Amount
Tax on Rs 2,50,000 Nil
Tax on next Rs 2,50,000 @ 5% 12,500
Tax on remaining Rs 250000 @ 20% 50000
Total Tax 62500
Tax on Non-Agricultural Income
i.e., Rs 112500-Rs. 62500
Less: Rebate u/s 87A 12500
Add: EC & SHEC @@4% 1500
Total Tax Payable 39000

If the assessee has salary income of 500000, tax would have been 12500 which would again set-off against rebate of 87A and so tax payable would have been Nil, whereas, in the above case the tax payable due to shift in slab because of huge agricultural income will be more than 12500 as shown above. Therefore, even though agricultural income is exempt, you’ll have to pay some tax on agricultural income.

Treatment of Agricultural Land in Capital Gain

Section 54-B gives relief of capital gains to a taxpayer who sells his agricultural land and from the sale proceeds acquire another agricultural land. The conditions for claiming the benefit u/s 54B are:

  • The assessee should be an individual or HUF
  • Asset transferred should be agricultural land, whether a long-term capital asset or short-term capital asset. (It is important to know here that rural agricultural land or agriculture land in the rural area is not a capital asset, and hence, exempt from capital gains)
  • The agricultural land should be used by the individual or his parents or any member of HUF for agricultural purposes at least for two years immediately preceding the date of transfer of land, and
  • The taxpayer should acquire another agricultural land within two years from the transfer date.

However, as per section 10(37), no capital gain would be chargeable to tax in case of an individual/HUF, if the agricultural land is compulsorily acquired under any law whose consideration is approved by the Central Government or RBI and consideration received on or after 01.04.2004.

What is agriculture Income Tax Exemption limit under Section 54B?

The amount of exemption u/s 54B shall be the lower of the following:

  • Amount of capital gains arising on transfer of agricultural land; or
  • Investment in a new agricultural land or the amount deposited in the Capital Gains Deposit Account Scheme.

For example:- if you sold agricultural land in April, 2017 for Rs. 25,20,000 and the long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. In December, 2017 you purchased another agricultural land worth Rs. 5,00,000. Then, the agricultural income tax calculation for AY 2019-20 in your hand would be calculated as follows:

Particulars Amount (In Rs.)
Long-term capital gain arising on transfer of old land 8,40,000  
Less: Exemption under section 54B (*) 5,00,000  
Taxable Long-Term Capital Gains 3,40,000

(*) Exemption under section 54B will be lower of following:

(i) Amount of capital gains arising on transfer of agricultural land i.e., Rs. 8,40,000; or

(ii) Investment in new agricultural land i.e., Rs. 5,00,000.

Thus, the exemption will be of Rs. 5,00,000.

Also, if a taxpayer purchases a new agricultural land just to claim exemption u/s 54B and subsequently transfers the new piece of land within 3 years from the date of its acquisition, then the benefit granted under section 54B will be withdrawn.

How to show agricultural income in ITR 1?

Agricultural income in ITR 1 is to be shown under the column of Agriculture Income. But ITR 1 can only be used if the agricultural income is up to Rs 5,000. In case the said income exceeds this limit form ITR-2 is required to be filed.

We hope now there’s clarity on how much tax is actually payable by you on the earnings from the agricultural land and the benefits of agricultural land in capital gain!

Frequently Asked Questions

Q- How much agricultural income is tax-free?

Agriculture income is exempt from the tax. However the state government can charge agriculture tax, income from agriculture up to rupees 5000 is not taxable.

Q- How is agricultural income calculated?

Agriculture income is calculated by deducting the expenses of agriculture from the agricultural income.

Q- What are the kinds of agricultural income?

Agriculture income is included these incomes,
1. Rent received from the agricultural land situated in India.
2. Income from the sale of agricultural produce.
3. Income derived from the farm building required for the agricultural purpose.

Q- What is partly agricultural income?

Partial agricultural income is the income where the assessee is growing agricultural produce and using them as raw material for the manufacturing of products. Here income from the sale of products is partial agriculture income and partial non-agricultural income.

Q- What if agricultural activities are carried on urban land?

Same provision of taxability of agriculture income is applicable on agriculture income generated through urban land.

Q- Will income from animal husbandry be considered agricultural income?

No income from animal husbandry is not considered agriculture income.

Q- How to calculate tax on agricultural income?

1. Agriculture income and non-agriculture income added
2. Calculate tax on total income
3. Add basic exemption limit to net agriculture income
4. Calculate income tax on step 3
5. Deduct the amount of tax calculated in step 4 from the amount calculated in step 2
6. Subtract rebate under 87A
7. Add health cess

Q- Is agricultural income wholly exempt from income tax?

If the income of the assessee falls in the 2 conditions then agriculture income is exempt : 1. Net agriculture income is less than 5000 2. Total income, excluding agriculture income, is less than the basic exemption limit.

Q- What is not considered agricultural income in India?

These are not considered as agriculture income
1. Breeding of livestock
2. Dairy farming
3. Fisheries
4. Poultry farming

Q- What is Section 54B of the Income Tax Act, 1961?

Section 54B is the agricultral tax exemption available for the individual and HUF. if Individual or HUF is selling urban agriculture land and purchasing urban or rural agriculture within 2 years of the date of transfer. Exemption would be available for the lower of capital gain and amount invested in acquiring new agricultural land.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.