The world is dependent on agriculture for its food needs. It is the sole revenue source for the vast rural population of India. The Government of India implements a wide range of farmer welfare plans, policies, and other initiatives to encourage expansion in this field. One such welfare program is an exemption of agricultural income from income tax. That means agricultural income is not taxable in India.
The Income Tax Act provides an interpretation of agricultural income that comprises the following three primary activities:
- The revenue generated by rent or lease of agricultural land in India which is utilized for purposes of agriculture.
Rent is the amount paid for being able to utilize the land. The potential sources of income that could be earned from land are numerous. One example is the charges received for the renewal of land grants on lease. However, the revenue from land does not include the consideration paid on the land’s sale. The income derived from land used for agriculture can be categorized as follows:
- Income derived from land that is used for farming by the following methods:
- Agriculture consists of two types of operations:
- The basic agricultural operations comprise cultivation of the land, tilling of the soil, sowing seeds, planting, and any other operation which requires human expertise and exertion in direct contact with the land.
- The subsequent agricultural operations include the operations performed to develop and maintain the agri-produce, such as the weeding, digging holes around the plants, and those that allow the product to be suitable for commercial use such as cutting, pruning, harvesting, etc. Earnings from saplings and seedlings in a nursery could be considered an agricultural income regardless of whether the primary actions were conducted on the land. If the business activities are not related to land, such as poultry farming, breeding, rearing animals, dairy farming, etc., they are not part of the agricultural income.
- The revenue generated by sales to the market of products that is derived from agricultural land.
- The profits resulting from the sale are exempted from agricultural income. The rest of it is not agricultural (taxable) revenue.
- It has set out rules for this division between agriculture and non-agricultural crops for products such as coffee, tea, and rubber, among others.
- The revenue generated by the rental or lease of buildings located on or surrounding the agricultural land.
The requirements for the classification of income from building farms as income from agriculture are as these:
- The property should be on or within the immediate vicinity of the land used for farming. It is on rent. The farmer needs to use the structure as a home to live in or a storage building or use it for the same kind of purposes.
- The land is assessed using either the land income or a local tax imposed and collected by government officials. If the previous condition is not met, the land should not be located in the following regions:
|Distance from municipality*||Population (last preceding census)|
|Within 2 km||Between 10,000 and 1,00,000|
|Within 6 km||Between 1,00,000 and 10,00,000|
|Within 8 km||More than 10,00,000|
*Municipal corporation includes a municipal corporation, the notified area committee, town area committee, and cantonment board.
Even if the local population is less than 10,000, the land must be outside the authority of the local municipal or the cantonment boards.
Is Agricultural Income taxable?
In India, agricultural income is tax-free. Agriculture income is not tax-deductible following the provisions of Section 10 (1) of the Income Tax Act as it is not considered part of an individual’s total earnings. But, the Income-tax Act has provided for taxing agricultural income indirectly. This concept is described as the partial combination of agricultural income with non-agricultural earnings. It is aimed at taxing non-agricultural income at higher levels of tax.
The state government can assess taxes on agricultural income when the amount is greater than Rs.5,000 each year. This method is only applicable if all the conditions listed below are fulfilled:
- With this method, individuals such as HUFs, BOIs, AOPs, and artificial legal persons must calculate their tax-deductible income. Therefore, companies, co-operative societies, firms/LLPs, and local authorities are excluded from the calculation using this method.
- Gross agricultural revenue is more than Rs.5000 during the entire year.
- Non-agricultural income includes:
- More than Rs.2,50,000 for those who are less than 60 and other eligible persons.
- More than Rs.3,00,000 for people between 60 and 80 years.
- More than the amount of Rs.5,00,000 for those who are over 80 years of age.
In simple words, the non-agricultural earnings must be higher than the maximum amount that is not tax-deductible, as per these slab rates.
While exempt from tax under Section 10 (1), tax on agriculture-related income remains at the state level when the income is greater than INR 5000 per annum and when the total amount of income, excluding agricultural income, is greater than the limit of exemption for basic. It is simpler for individuals, businesses, and companies to pay the tax since it is charged as an annual amount on the taxable income. For salaried people, they may be charged a higher tax they have to pay due to the aggregation of income.
Some exceptions to this income would be as follows:
- The revenue from the sale of processed agricultural produce with no actual agricultural activities. For example, the revenue from highly processed produce and the timber that was sold off as furniture.
- When looking at an income, the most important thing to consider is a valid agricultural income.
- The income should come from an existing piece of land.
- The source of income should be the land that is utilized for agriculture-related activities.
- Produce should be the main source of income produced by land cultivation.
- Income from property that is not in control of the assessee.
Treating Agricultural Land as Capital Gain
Section 54B provides relief from capital gains to taxpayers who sell their agricultural land and the proceeds of the sale-purchase, additional land for farming. The requirements for getting the benefit under section 54B are:
- Assessees should be individuals or HUF.
- The assets transferred should comprise agricultural land regardless of whether it is an asset for long-term or short-term capital assets. It is crucial to note that agricultural land in rural areas is an asset that is not capital and, therefore, is exempt from capital gains.
- The agricultural land must be used by the person or his parents or any other member of HUF for agriculture for at least two years immediately prior to the date on which the land is transferred.
- The taxpayer is required to purchase another piece of land for agriculture within two years after the date of transfer.
However, in accordance with section 10(37), the law states that there are no capital gains, subject to taxation in the case of an individual or HUF when the land was legally acquired according to any law.
Why is Agricultural Income not Taxable in India?
Farming is the primary source of revenue for most of the small-scale Indian population. The tax exemption for agricultural income is a benefit to large and medium farmers and agricultural enterprises, which is not the intention. The earnings of marginal and small-scale farmers are significantly less than the threshold for taxation of 2.5 lakh for individual income taxes.
It is also the case that, while small-scale farmers are not affected by tax exemptions provided by the Indian Income Tax Act, wealthy farmers have enjoyed the benefits of these exemptions by utilizing the exemptions.
But there is another side of the coin also. Suppose the authorities intended to give relief for farmers by not exposing them to taxation on income. In that case, they could have accomplished this by setting a minimum level for agriculture income that is tax-free. If an income source is tax-free without limitation, it is clear that farmers aren’t the sole beneficiary of this tax break and that there is a more giant conspiracy for the provision of this tax relief in an unlimited amount, through the creation of the provision for this under the Income Tax Act.
Should Agricultural Income be Taxable?
Taxing agricultural earnings is not easy. It is crucial to strike the right balance between the taxation of income from agriculture and demotivating the agricultural sector. From a constitutional perspective, only states can impose the tax.
The best option is to alter the definition of “agricultural income” in the tax laws and impose an appropriate monetary threshold following thorough consideration and research. The income that is not included under this new definition could be taxed as income. This will ensure that only farmers with high incomes fall under the taxation regime and that the interest of the small and mid-scale farmers is safeguarded.
However, the government’s current efforts on bringing farmers into the formal system through promoting digital economics is a move toward the proper direction. Taxation of agricultural income should be considered with sufficient data on the effect and knowledge of the different sources of income from agriculture. The government may consider mandating farmers with incomes that exceed the threshold!
Agricultural Income – Frequently Asked Questions (FAQs)
Are farmers exempt from paying income tax?
Yes. Indian farmers are exempted from paying taxes on agricultural income.
Is the agricultural income entirely tax-free?
In accordance with the provisions of Section 10(1) of the Income Tax Act, 1961, any earnings derived by any agricultural venture are exempt from taxation by the Government of India. However, income from agriculture may be considered for tax purposes if the total agriculture income is greater than Rs.5,000.
How much of the agricultural income is tax-free in India?
When the farmer’s earnings are lower than Rs.5,000, it is tax-free. The basic exemption amounts to Rs.2.5 lakh for individuals under 60 years old as well as Rs.3 lakh for individuals older than 60.
How to demonstrate the agricultural income In ITR 1?
In ITR 1, you should include agricultural income in the column of Income from Agriculture. However, the ITR1 is only applicable when the income from agriculture is more than Rs 5,000. If the income exceeds this amount, it is necessary to file ITR-2.
How is agricultural income calculated?
The income from agriculture is calculated by subtracting the farming costs from the agricultural income.
What are the kinds of agricultural income?
Agricultural income includes:
Rent derived from the agricultural land located in India.
The income from the sale of agricultural products.
The income that is derived from the farm building needed for the agricultural purpose.
What about tax, if agricultural activities are carried on urban land?
Similar taxability provisions for agricultural income are also applicable to the income derived from urban land.
Will the income from animal husbandry be considered agricultural income?
No. The income earned from animal husbandry is not considered to be agricultural income.
Is agricultural income wholly exempt from income tax?
The following conditions apply to agriculture income:
Net income from agriculture is not more than 5000.
Excluding agricultural income, total income is less than the exemption threshold for basic income.
What is not considered agricultural income in India?
Income from the following are not considered as an agricultural income:
Breeding of livestock
What is Section 54B of the Income Tax Act, 1961?
Section 54B provides an exemption for both the HUF and the individual. If an individual or HUF is selling land for urban agriculture and buying rural or urban agriculture within 2 years from the date of the transfer. The exemption is offered for the capital gain and the amount invested in purchasing new land for agriculture.