Agricultural Income [Section 10(1)]
As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax. Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means:
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
Tax on sale of agricultural land:
Before 1970, profit on the sale or transfer of all agricultural land was considered rent or revenue derived from the land. Such profit was, therefore, tax-exempt as agricultural income. There were several favorable judgments of various High Courts on the issue. However, via a retrospective amendment that took effect from April 1, 1970, land qualifies to be an agricultural land if the prescribed conditions are satisfied. An agricultural land does not form part of the definition of a capital asset and hence, there will be no capital gains on the sale of such land. Any other land not forming part of the above will be a capital asset and sale of the same shall attract tax on capital gains subject to Section 54B, which is explained below.Section 54B: Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases Section 54B gives relief to a taxpayer who sells his agricultural land and acquires another agricultural land from the sale proceeds. Conditions to be satisfied to claim the benefit of this Section:
a. The assessee must be an individual or a HUF. b. The agricultural land should have been used for agricultural purposes. It may be a long-term asset or a short-term asset. c. It must have been used either by the assessee or his parents for agricultural purposes in at least two years immediately preceding the date on which the transfer of land took place. d. The assessee should have purchased another land, which is being used for agricultural purposes, within a period of two years from the date of sale.Note: In case of compulsory acquisition, the period of acquisition of new agricultural land will be determined from the date of receipt of compensation. However, as per Section 10 (37), no capital gain would be chargeable to tax in case of an individual or HUF if agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and received on or after 01-04-2004. e. The whole amount of capital gain must be utilised in the purchase of the new agricultural land. If not, the difference between the amount of capital gain and the new asset will be chargeable as capital gains and the tax will be computed accordingly.f. The new asset purchased should not be sold within a period of three years from the date of acquisition.g. If sold, the cost of the new asset will be reduced by the amount of capital gain (claimed as exemption under Section 54B) for the purpose of computing tax on capital gains.h. Where the amount of capital gain is not utilised by the assessee for the purchase of the new asset before the due date of furnishing his return of income, he may deposit it in the Capital Gains Account Scheme (CGAS) of any specified bank.i. In such a case, the cost of the new asset shall be deemed to be the amount already utilised by the assessee for the purchase of the new asset together with the amount deposited in the CGAS.j. If the deposited amount is not utilised for the purchase of the new asset within the specified period, then the unutilised amount shall be taxed as income in the year in which the period of two years from the date of sale of the original asset expires.
Calculation of Agricultural Income
1.Calculate Tax on: (Non-Agriculture Income + Net Agricultural Income)2.Calculate Tax on: (Net Agricultural Income + Maximum exemption limit as per slab rates)
3.Calculate final tax (1)-(2) as above and:
- Rebate, if available + Surcharge, as applicable + Education and Secondary and higher education cess
Agricultural income is considered for rate purposes while computing the income tax liability, if following two conditions are cumulatively satisfied.
• Net Agricultural income exceeds Rs. 5,000/- for previous year, and • Total income, excluding net Agricultural income, exceeds the basic exemption limit. Once the aforementioned conditions are satisfied then we shall compute the Tax liability in the following manner:First, include the Agricultural income while computing your income Tax liability.
Example – Let us say that an Individual Assessee has a Total income of INR 8,50,000/- (excluding Agricultural income) and a Net Agricultural income of INR 300,000/-. Then, per this step, Tax shall be computed on INR 8,50,000/- + INR 3,00,000/- = INR 11,50,000/-. Thus, income Tax amount as per this step shall be INR 1,57,500/- for an individual who is below the age of 60 Years.
Second, add the applicable basic tax slab benefit, as applicable, to the Net Agricultural income. Thus, per our example mentioned above, we shall add INR 2,50,000/- to INR 3,00,000/- as the applicable Tax slab benefit available to an individual below 60 Years of age is INR 2,50,000/-. Now we will compute income Tax on INR 3,50,000/- (Tax slab benefit 2,50,000 + Net Agricultural income 3,50,000). The amount of Tax shall be INR 32,500/-.
Third, Third, subtract the Tax computed in Second step from the Tax computed in First step = INR 1,25,000/-. Thus, this is the income Tax liability subject to deductions, Education Cess etc., as applicable.This process of computation is, however, followed only if the assessee’s non-agricultural income is in excess of the basic exemption slab.
Income Tax Return:
If the aggregate agricultural income of the assessee is up to Rs. 5,000/- disclose the agricultural income in the income tax return (ITR) 1. But if the agricultural income exceeds Rs. 5,000, then form ITR 2 applies.
Examples of Agricultural Income
The following are some of the examples of agricultural income:• Profits received from a partner from a firm engaged in agricultural produce or activities.
• Interest on capital that a partner from a firm, engaged in agricultural operations, receives.
• Income derived from sale of replanted trees.
• Rent received for agricultural land.
• Income from growing flowers and creepers.
• Income from sale of seeds
Examples of Non-Agricultural Income
The following are some of the examples of non-agricultural income:• Receipts from TV serial shooting in farm house.
• Income from bee hiving.
• Any dividend that an organization pays from its agriculture income.
• Income from the sale of spontaneously grown trees.
• Income from salt produced after the land has flooded with sea water.
• Purchase of standing crop.
• Income from dairy farming.
• Royalty income from mines.
• Income from poultry farming.
• Income from butter and cheese making.
FAQ 1 I have a business income of Rs 5,00,000 and agricultural income of Rs 2,00,000. These figures relate to the Assessment year 2019-20. How will my tax liability be computed?
Agricultural income is exempt under Section 10(1) of the Act so long as the income is derived from agricultural land situated in India. This income is, however, included merely for rate purposes and rebate is allowed on the same in accordance with the Finance Act. The inclusion of Agricultural income for rate purpose is only required if total income (excluding agricultural income) of an individual exceeds Rs. 2,50,000/- (assessee being aged less than 60 years of age).
| Particulars | Amount in Rs. |
|---|---|
| Business Income | 5,00,000/- |
| Agricultural Income | 2,00,000/- |
| Income Including Agricultural Income | 7,00,000/- |
| Tax on 7,00,000/- | 52500/- |
| Less: Rebate on Agricultural Income | |
| (Tax on Rs. 2,00,000 + Rs. 2,50,000 being basic exemption) | 10000/- |
| Net Tax Payable | 42,500/- |
| Add: Health & Education Cess @ 4% | 1700/- |
| Total tax Payable | 44,200/- |