Agricultural Income: Tax Exemptions and Filing Rules

What is Agricultural Income in Income Tax?

Agricultural income includes the earnings or revenue derived primarily from agricultural activities on designated agricultural land. These activities include cultivating land, utilizing buildings situated on agricultural land, and harvesting commercial produce from horticultural land.

Examples of Agricultural Income

Agricultural income includes the earnings or revenue derived primarily from agricultural activities on designated agricultural land. These activities include cultivating land, utilizing buildings situated on agricultural land, and harvesting commercial produce from horticultural land.

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

b) Agricultural income encompasses revenue generated from the production of agricultural goods that necessitate processing before they can be marketed. For example, oats require husk removal before they can be sold.

c) Agricultural income includes earnings derived from cultivating and selling agricultural produce directly from agricultural land. For instance, revenue from the sale of tomatoes grown on agricultural land is considered part of agricultural income

(d) 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.

**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:

Examples of Non-Agricultural Income

• Breeding of Livestock.
• Poultry Farming
• Fisheries
• Dairy farming
• Bee hiving
• Fisheries
• Cutting and Selling timber trees
• Butter and Cheese-making

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.

However, the income tax act indirectly taxes the agricultural income using a method called partial integration of agricultural income with non-agricultural income. This method taxes the non-agricultural income at higher tax rates.

Applicability

This method applies to HUFs, AOP, BOIs, and artificial judicial persons and does not apply to companies, LLPs, cooperative societies and local authorities.

Here are the conditions that need to be met -

If net agricultural income exceeds Rs. 5,000 during the year and non-agricultural income is above the basic exemption limit, the following thresholds apply:

• For individuals below 60 years of age and other applicable persons (old regime): greater than Rs. 2.5 lakh
• For individuals between 60 and 80 years of age (old regime): greater than Rs. 3 lakh
• For individuals above 80 years of age (old regime): greater than Rs. 5 lakh
• For all individuals, regardless of age (new regime): greater than Rs. 3 lakh

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 the 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 if your agricultural income exceeds Rs. 5,000 and you have other sources of income, then the tax liability for that year is to be calculated as follows and applicable to Individuals, HUFs, AOPBOIs, and Artificial Judicial Persons.

1. Compute income tax on the aggregate income (i.e., agricultural income + other income) as per the prevailing income tax rates (without surcharge and cess)
2. Compute income tax on the sum of the amount of the basic exemption limit plus agricultural income as per the prevailing income tax rates (without surcharge and cess)
3. Now, Compute (1) – (2) to arrive at the tax liability for the year. (add surcharge if any, add cess)

How to calculate tax on agriculture income for AY 2024-25

Suppose you earn Rs. 4,00,000/- as salary income and Rs. 90,000/- as agricultural income for the assessment year 2024-25.

The computation shall be as follows:

a. Calculate tax on total income of Rs 4,90,000 (old tax regime)

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 net tax payable= 7500 + 4%=7800

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

Tax Implications on Agriculture Income in Certain Cases

Say you’ve earned a salary income of Rs 500000 and an agricultural income of Rs 500000 during the A.Y. 2024-25

a. Calculate tax on total income of Rs 10,00,000(old tax regime)

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

If the assessee has a salary income of 500000, the tax would have been 12500, which would again set-off against rebate of 87A, and so the 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.

Additional Points to Consider for Agriculture Income

Qualifying for Tax-Exempt Income

• Land Use: To qualify for tax-exempt income, the land must be used for agricultural purposes. This includes cultivating crops, fruits, vegetables, and other land-based products. Activities like raising livestock, poultry, or fish are generally not considered agricultural operations for tax purposes.
• Ownership: For income from rent or revenue to be tax-free, the taxpayer must have an interest in the land (owner or mortgagee). However, for income from agricultural operations, the cultivator (who may be a tenant or sub-tenant) can qualify for tax benefits even if they don't own the land.

Special Cases

• Carry-Forward Losses: Losses from agricultural operations can be carried forward for eight years and used to offset future agricultural income.
• Income from Trees: Income from cutting and selling timber trees is not considered agricultural income because it doesn't involve activities like cultivation or harvesting.
• Plantation Crops: Income from certain plantation crops like rubber, tea, and coffee receives special tax treatment. This is because their production involves a mix of agricultural and non-agricultural activities. The income is divided, with only the agricultural portion being tax-exempt.

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, acquires 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, 2019 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 2019, 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 the 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 ITR (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, then ITR-1 (Sahaj) cannot be used, and they must file an 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 for income tax filing. 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 eCA today! and ensure timely filing before the income tax return's last date!