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Provision of Agricultural Income under Income Tax Act

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Agriculture is said to be the main day job in India. It is generally the only source of income for the large rural population in India. Moreover, the country is entirely dependent on agriculture for its basic food requirements. The government has numerous schemes, policies and other measures to promote growth in this sector- one of them being an exemption to income tax. Many committees were established for imposing partial or some type of method for charging tax on the agricultural revenue, but none of the measures ever saw the light of the day.

According to section 2(1A) of the Income Tax Act, agricultural income can be defined as follows:

  • Any rent or revenue obtained from land located in India and is used for agricultural purposes.
  • Any income obtained from such land by agriculture operations, including the processing of agricultural produce to render it suitable for the market or sale of such produce.
  • Any earnings attributable to a farmhouse is subject to the satisfaction of definite conditions stated in this regard in section 2(1A). Also, any income obtained from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Agricultural income in India is exempt from tax by virtue of section 10(1). Income from agricultural land situated outside India is taxable as income from other sources.

Examples of agricultural income

  • Income from the sale of replanted trees.
  • Rent obtained for agricultural land.
  • Income from growing flowers and creepers.
  • Share of gain of a partner from a firm engaged in agricultural operations.
  • Interest on capital acquired by a partner from a firm engaged in agricultural operations.
  • Income obtained from the sale of seeds.

Income which is partly agricultural and partially non-agricultural
When an assesse is carrying on both operations, i.e. agricultural and non-agricultural, then the assesse is liable to pay tax on non-agricultural income. While computing non-agricultural income, the market value of agricultural produce shall be deducted, and no further abstraction shall be made in respect of any expenditure.

The disintegration of income in a specific composite scheme

Nature of business Agricultural income Non-agricultural income
Income from growing and manufacturing of tea. 60% 40%
Income from growing and manufacturing of coffee (only cured) 75% 25%
Income from growing and manufacturing of coffee (only cured) 60% 40%
Income from growing and manufacturing of rubber. 65% 35%

Tax treatment of Non-agricultural income if the assesse earns agricultural income
Where non-agricultural income exceeds basic maximum exemption limit not chargeable to tax and agricultural income exceeds Rs. 5,000 then tax shall be calculated by applying the following steps:

  1. Calculate tax on the aggregate income (i.e. agricultural income + non-agricultural income).
  2. Calculate tax on [basic exemption limit + agricultural income] as total income.
  3. Step1 – step 2 shall be the tax payable.
  4. Less: rebate u/s 87A of maximum Rs. 12,500 (where total income other than agricultural income does not exceed Rs. 5, 00,000)
  5. Add: Health and Education cess (HEC) @ 4%

Challenges in taxing the agricultural income
Taxing the agricultural income is a very difficult task as the complete process includes a lot of hiccups. The major is that the issue is so political that it will spontaneously ring in the adverse points for anyone who tries to implement it. The other is that this tax would be looked at as a tax that plays with the life of nearly 600 million individuals, which no political party would dare to play with. Also, most farmers in India are socially and economically backward, and most of them don’t own more than small pieces of land. So the imposition of taxes on such income will only bring more distress for the farmers rather than growth of the economy and country. Imposing agricultural tax in an agrarian economy is a tedious function as deciding upon tax slabs, and the value of output or net income received by farmers is a very herculean task, and even if we contemplate the fact that somehow this tax gets implemented, then the load of it will have to be carried by the customers as they would be required to shell out more than the required amount. The issue doesn’t end here; if we take a closer look at implementing this taxation perspective, then it will be found that levying taxes on agriculture will be a very daunting task as the output of agriculture depends on numerous external components such as weather, availability of quality raw material etc. Looking from a legal angle, it can be found that the authority to impose taxes on agriculture rests only with the state governments, and any discussion revolving around changes in the same will lead to political turmoil, thus making the complete task next to impossible. 

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, TDS returns, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about the provision of agricultural income, kindly contact us.


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