Agricultural income in India occupies a unique position within the framework of the Income Tax Act, 1961. While generally exempt from taxation at the central level, it can significantly influence an individual's overall tax liability and is subject to taxation by state governments. This article delves into the intricacies of agricultural income, its tax implications, and the relevant provisions under the Income Tax Act.
Section 2(1A) of the Income Tax Act provides a comprehensive definition of agricultural income. Essentially, it includes income derived from sources directly related to agricultural activities, including:
This includes rent or revenue generated from leasing agricultural land for farming purposes, as well as income from the land itself through cultivation of crops, fruits, vegetables, and other agricultural produce.
Income derived from activities closely associated with agriculture, such as livestock rearing (dairy farming, poultry farming), beekeeping, sericulture, and other allied activities.
May include income from the sale of agricultural produce, income from the sale of trees grown on agricultural land (excluding timber), and other related sources.
Agricultural Income | Non-Agricultural Income |
Gains a partner receives from a company that engages in agricultural activities or production | Income from selling and cutting trees for lumber. |
Income from seed sales | Agricultural land income is held as stock-in-trade |
Earnings from growing creepers and flowers | Receipts from the farmhouse's use as the set for a TV series |
Rent earned from agricultural land | Any dividend received from a company's agricultural earnings |
Sales of trees that have been planted again | Income from producing cheese and butter |
Interest on funds received by a partner from a business operating in agriculture. | Income from raising poultry |
- | Income from the dairy industry. |
- | Earnings from bee hives. |
These exclusions include:
Income from selling processed agricultural products without engaging in actual farming activities
Earnings from highly processed agricultural goods
Proceeds from the sale of trees as timber
Central Government: A cornerstone of the Income Tax Act is the exemption of agricultural income from central taxation. Section 10(1) of the Act explicitly exempts agricultural income from the purview of income tax levied by the Central Government. This exemption applies regardless of the amount of agricultural income earned.
State Government: While exempt from central taxation, agricultural income can be subject to taxation by state governments. Most states in India levy a tax on agricultural income exceeding a certain threshold, which is typically a nominal amount. This state-level tax is levied and collected by the respective state governments according to their own tax laws and regulations.
Income above â‚ą5,000: While agricultural income is exempt from tax under Section 10(1), it may still attract state-level taxes if it exceeds â‚ą5,000 annually and the total non-agricultural income surpasses the basic exemption limit.
Basic threshold limit: Tax liability arises if the combined agricultural and total income exceeds the basic exemption limit.
Age | Exemption Limit |
Under 60 years | Rs.2,50,000 |
60- 80 years | Rs.3,00,000 |
Above 80 years | Rs.5,00,000 |
For firms, non-individuals, and companies: They are subject to tax at a flat rate on their chargeable income.
For salaried individuals: Agricultural income could increase their overall tax liability due to income aggregation.
Although agricultural income itself is generally exempt from central income tax, it can indirectly influence the overall tax liability of an individual. This is due to the concept of "aggregation of income" for determining the applicable tax slab.
Aggregation of Income: When calculating income tax liability, the total income of an individual is considered, including both agricultural and non-agricultural income. Even though agricultural income is not directly taxed at the central level, its inclusion in the calculation of total income can push an individual into a higher tax bracket, resulting in a higher tax liability on their non-agricultural income.
The calculation of income tax liability involving agricultural income can be summarized as follows:
Determine Total Income: Calculate the total income of the individual, including both agricultural and non-agricultural income.
Determine Taxable Income: Subtract the applicable deductions and exemptions from the total income to arrive at taxable income.
Apply Tax Slabs: Determine the applicable tax slab based on the taxable income.
Calculate Tax Liability: Calculate the tax liability based on the applicable tax slab and the taxable income.
Consider State-Level Taxes: If applicable, calculate and add any state-level taxes on agricultural income to the overall tax liability.
Section 54B of the Income Tax Act provides a specific tax benefit to individuals and Hindu Undivided Families (HUFs) who sell their agricultural land and reinvest the proceeds in acquiring new agricultural land. This section allows for a tax exemption on the capital gains arising from the sale of agricultural land, provided certain conditions are met:
Eligibility: The benefit is available to individuals and HUFs.
Land Use: The land sold must have been used for agricultural purposes by the individual or any member of the HUF for at least two years prior to the sale.
Reinvestment in Agricultural Land: The proceeds from the sale of the agricultural land must be reinvested in the purchase of new agricultural land within a specified timeframe.
Agricultural income, while exempt from central income tax, plays an important role in the Indian tax system. Understanding its implications is crucial for farmers, taxpayers, and tax professionals. While the central government generally does not levy tax on agricultural income, state-level taxes and the impact of agricultural income on the overall tax liability due to income aggregation need to be carefully considered.
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*All savings are provided by the insurer as per the IRDAI approved insurance plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
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