About 60% of the Indian population is engaged in agriculture, with the sector's contribution to the country’s total GDP being around 18%. To promote the growth of this vertical, the Indian government has introduced umpteen schemes, policies and measures.
One such critical measure is the exemption of agricultural income tax. So, if you are wondering, ‘Is agricultural income taxable?’ The answer is yes. However, note that agricultural income is subject to special provisions.
An essential provision is that it is taxed indirectly. Despite this, you need to know that agricultural income taxability is different from that of income from salary, profession, or other means.
Understanding these income tax rules and regulations will enable better tax planning. It also allows you to maximise your savings while complying with the law.
Read on to learn more about the agricultural income taxation law and how to calculate the tax under the same.
Agriculture income refers to any amount of income earned from farming activity on horticultural land. This includes income from farming land, building or commercial produce. Simply put, any revenue you generate solely from agricultural activities is known as agricultural income.
According to Section 2(1A) of the Income Tax Act of 1961, agriculture income is defined according to three main activities mentioned here:
Income on rent or revenue earned from the direct use of land
Income or revenue generated from the sale of agricultural produce
Income or rent obtained by leasing or renting buildings surrounding the agricultural land
While these three activities are defined as per the agricultural income taxation law, knowing the loopholes of the last point is crucial. You must ensure that the building from which revenue is being generated must be occupied by a cultivator or a farmer.
Also, this building has to be in the immediate vicinity of your agricultural land, and you need to use it for a dwelling or as a storehouse. It is important to adhere to these guidelines to avail of agricultural income taxability benefits.
To sum up, know that income generated from rent, revenue and labour fees due to activities involved in agricultural production are included in income tax. However, there are a few exceptions to this list.
Any income generated from the sale or renewal of a lease of horticultural land is not included in the agriculture income. Furthermore, the agricultural income tax treatment for products like coffee, tea and rubber is different.
For example, when considering the net income from rubber manufacturing, 35% is taxable as business tax and 65% as agricultural tax.
To better understand the farm income tax, it is crucial to know the inclusions of agricultural income and non-agricultural income.
Agricultural income includes the following:
Income earned from selling seeds
Income generated from creepers and flowering plants
Income obtained from selling replanted trees
Rent acquired from an agricultural land
Revenue or income generated from a firm engaged in agricultural activities
Interest income generated on capital by a firm involved in agricultural operations
Non-agricultural income comprises the following:
Farming of dairy animals
Apiculture or bee hiving
Income from sales of standing crops
Income from sales of dairy products, such as cheese and butter
Revenue generated from TV serial shoots or filmmaking on the agricultural land
Selling of timber wood
An indirect method introduced to tax agricultural income is referred to as the partial integration of non-agricultural income with agricultural income. According to this method, agricultural land is liable for income tax under these two conditions:
Agricultural income per annum is over ₹5,000 for a financial year
Non-agricultural income is about ₹2.5 Lakhs per year for everyone below 60 years, ₹3 Lakhs for those from 60 to 80 years old and ₹5 Lakhs for those over 80 years
All income will be subjected to agricultural income tax treatment as per the existing tax slab. So, any income over the prescribed threshold should be liable for tax under the Income Tax Act.
Calculation of agricultural income is done in three steps:
Step 1: Calculating tax on net agriculture income + net non-agricultural income (A)
Step 2: Calculating tax on net agriculture income + exemption limit per the tax slab rate (B)
Step 3: Final tax calculation of A - B
When computing the final tax calculation in the third step, you must subtract any rebate. Also, remember to add the surcharge, health and education cess to get the total tax liability amount.
Capital gains on land transfer are exempt from taxation under this section according to agricultural income taxation law. Hence, you are exempt from agriculture income tax oncapital gains when you sell one agricultural land and buy another one within a span of two years.
This way, Section 54B provides relief to all taxpayers selling agricultural land and buying another one using the sale proceeds. In addition, there are exclusions to filing ITR for agricultural income.
For individuals engaged in agriculture activity with an annual income of up to ₹5,000, you can file for agricultural income tax as per ITR 1 Form. However, for income exceeding ₹5,000, you must file your returns via ITR 2 Form.
Now that you know how agricultural income in taxation law is treated, be sure to use the above information to file accurate returns.
In addition to the tax benefits under Section 54B, you can leverage other applicable deductions and exemptions to save more. Account for deductions and exemptions accurately to avail relevant tax benefits.
Under Section 54B of the Income Tax Act, all capital gains from the transfer of agricultural land are exempt from income tax. However, you need to buy another agricultural land from the sale proceeds of the previous one within a span of two years.
According to the taxation law, agricultural income of less than ₹5,000 per year is exempt from taxation.
Animal husbandry, income from mines, purchase of standing crops, dairy, wood and timber sale are all included under non-agricultural income.
The income from agriculture of tea, coffee and rubber is bifurcated into agricultural and business tax. For example, 40% of the income generated from tea production is included under business tax and 60% as agriculture income tax.