Agricultural Income – Taxability & Treatment

What is the taxability of agricultural income in India?

In India, agricultural income is treated differently from other types of income for tax purposes. As per the Income Tax Act, agricultural income is exempt from income tax and is not included in the total income while calculating tax liability.

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 the 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.

(d) Income earned from commercial use of agricultural use

**Income from a farmhouse is exempt from tax if it meets certain criteria defined in section 2(1A) of the Income Tax Act:

• - The farmhouse should be situated on or near the agricultural land, and
• - The agricultural land should not fall within the specified area, which is:

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 p.a.;
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.

What are some exclusions to this income?

Few exclusion that not considered as agricultural income:

• Income from processed agricultural products without direct agricultural activities
• Income from highly processed products of agricultural origin
• Income from selling trees as timber

How to calculate tax on agriculture income for AY 2023-24?

Suppose, you earn Rs. 4,00,000/- as salary income and Rs. 90,000/- as agricultural income for the assessment year 2023-24.

The computation shall be as follows:

a. Calculate tax on total income of Rs 4,90,000

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

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. 2023-24

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

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

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 that rural agricultural land 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 for at least 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 the 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:

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

1. (i) Amount of capital gains arising on transfer of agricultural land i.e., Rs. 8,40,000; or
2. (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.

Which ITR to File for Agricultural Income?

If an individual has agricultural income up to Rs. 5,000: In this case, they can use ITR-1 (Sahaj) to file their Income Tax Return. Agricultural income up to Rs. 5,000 can be included in the column provided for Agricultural Income in ITR-1.

If an individual has agricultural income exceeding Rs. 5,000: If the agricultural income exceeds Rs. 5,000, then ITR-1 (Sahaj) cannot be used, and they must file their Income Tax Return using ITR-2. In ITR-2, there is a specific schedule (Schedule EI) to report agricultural income, regardless of its amount.

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, 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!

Are you unsure about the taxability and treatment of agricultural income? Our team of tax experts can provide you with the guidance you need. Whether you have questions about the exemption limit, calculating taxes, or showing agricultural income in your ITR, we have the knowledge and experience to assist you. Don't let the complexities of agricultural income taxation hold you back. Book a consultation with our eCAs today and ensure a seamless efiling of your income tax return.