Agriculture Income, It's Taxability and Exemption under Income tax

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Agriculture is said to be the primary occupation in India. It is usually the only source of income for the large rural population in India. The country as a whole is entirely dependent on agriculture for its basic food requirements. The government has numerous amount of schemes, policies and other measures to promote growth in this sector – one of them being an exemption to income tax.

Let us take a look at the provisions of the law in this regard.

What is agriculture income?

Agriculture income constitutes the following 3 main activities:

1. Income derived from agriculture land as below:

(A) Agriculture: Agriculture has been explained to consist of two types of operations. 

  • Basic agriculture operations would include cultivation of the land and consequently tilling of the land, sowing of seeds, planting and all such operations that require the human skill and effort directly on the land itself. 

 

  • Subsequent operations would include operations that are carried out for growth and preservation of the produce like weeding, digging soil around the crops grown etc and also those operations which would make the product fit for use in the market like tending, pruning, cutting, harvesting, etc. Income derived from saplings or seedlings grown in a nursery would also be considered to be agricultural income whether or not the basic operations were carried out on land.

(B) Through sale of such agriculture produce;

The Income Tax has prescribed rules to make this bifurcation regarding agricultural and non-agricultural produce for products like tea, coffee, rubber, etc 

2. Rent or revenue earned from agriculture land situated in india

Rent is the consideration for the right to use the land. The scope of the possible sources of income that can be derived from land is many.

3. Rent income derived from farm building required for agricultural operations:

The building should be on or in the immediate vicinity of the agricultural land and is one which the receiver of rent or revenue or the cultivator, by reason of his connection with the land, requires the building as a house to stay or as a storehouse, or uses it for these kinds of situations.


Taxation of agriculture income

As agriculture income is exempt from income tax, the income tax act has laid down a method to indirectly tax such income. This method or concept may be called as "Partial integration of agriculture income with non-agriculture income". It aims at taxing the non-agricultural income at higher rates of tax and  is applicable when the following conditions are met:

  • Individuals, HUFs, AOPs, BOIs and artificial juridical persons have to compulsorily calculate their taxable income using this method. Thus Company, firm/LLP, co-operative society and local authority are excluded from using this method.
  • Net agricultural income is greater than Rs. 5,000 during the year; and
  • Non agriculture income is below the taxable limit. (In simple terms, the non-agricultural income should be greater than the maximum amount not chargeable to tax (as per the slab rates).

Calculation of Agriculture Income

(1) Calculate tax on Non agriculture income + Net agriculture income

(2) Calculate tax on Net agriculture income  + Maximum exemption limit as per tax slab            rate

(3) Calculate final tax  (1) - (2) as above and:
      (-) Rebate, if available
      (+) Surcharge, as applicable
      (+) Education and secondary and higher education cess.

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