Agricultural Income: Tax Treatment and Taxability in India

Introduction

Agriculture income has been a topic of discussion among individuals and businesses. The agricultural sector supports a large amount of the economy but has certain tax provisions related to it which remain so complex for most taxpayers. Are you left in doubts as to whether agriculture income is taxable or not? Wondering how about filing returns with agricultural income? The importance of knowing the treatment of agriculture income in income tax is essential in taking up a financial decision and in complying with tax laws.

In this detailed guide, we will define agriculture income, understand the taxability of agricultural income in India, applicable conditions for an exemption, and identify how it can be taxed. After reading this article, you will understand how it is treated under the Indian tax law.

What is Agricultural Income?

Agricultural income is the income derived from agricultural operations. In Indian law, agriculture income includes earnings from cultivation of crops, raising livestock, and all activities directly related to agriculture. The Income Tax Act of 1961 treats agriculture income in respect to other sources of income, giving exemptions or concessions based on the nature and character of this income.
Agricultural income may be classified into primary and secondary income. Primary income arises from cultivation of land, while secondary income can be in the form of renting out agricultural land or sale of produce in the form of fruits, vegetables, or flowers.
For instance, if a farmer earns from rice, wheat, corn, and sugarcane, that income is ultimately his agriculture income. The same applies, say, to income earned from selling bananas on the hillside farm or income derived from animal husbandry operations.
It is, therefore, pertinent to note that the Income Tax Act of 1961 outlines strictly what agriculture income is and how such income should be treated.

Also Read: How NAIF Helps Farmers Invest in Infrastructure 

Definition and Examples of Agricultural Income Under the Income Tax Act of 1961

As per Section 2(1A) of the Income Tax Act of 1961, it  includes:

• Income from Land under Cultivation: This is the income earned from the sale of crops grown on agricultural land. For example, income from the sale of crops like rice, wheat, and cotton.
• Income from Agricultural Operations: Income earned from agricultural operations such as ploughing, sowing, harvesting, and threshing.
• Income from the Sale of Livestock: Income from breeding and selling livestock (e.g., cows, goats, poultry, etc.), provided the livestock is raised for agricultural purposes.
• Income from Land Used for Agro-based Industries: If agricultural land is used for agro-based industries (like food processing or fruit packaging), the income generated is also considered agriculture income.
• Rent of Agricultural Land: If a landowner receives rent for allowing someone else to cultivate their land, this rental income is also treated as agriculture income.

However, income from activities that are not related to agriculture, like income from the sale of processed food products, will not qualify as agriculture income. Similarly, income from the sale of timber or wood harvested from a forest owned by an individual is also considered agriculture income.

Tax Treatment of Agricultural Income in India

Agricultural income is exempt from income tax under Section 10(1) of the Income Tax Act, 1961. However, this exemption is subject to certain conditions. It is crucial to understand that while it is exempt from income tax, it may still have an impact on your overall tax liability, especially if you have non-agriculture income.

Key Points to Understand:

• Exemption of Agriculture Income: It is generally not taxed under Indian income tax laws. This includes the earnings from the sale of crops, livestock, and other agricultural produce.
• Impact on Other Income: While it is exempt from tax, it is included in the total income for calculating the tax rate for non-agriculture income. For example, if you have both agricultural and non-agriculture income, the agriculture income will be added to your total income to determine the tax slab applicable to your non-agriculture income.
• State Laws: Tax treatment of agriculture income may vary across states in India. Some states may have additional rules or charges related to land revenue, though income tax is exempt under the central laws.

Conditions for Exemption of Agricultural Income From Tax

For agriculture income to be fully exempt from tax, it must satisfy certain conditions. These conditions are as follows:

• The Income Must Be Earned From Agricultural Land: The land from which the income is generated must be used for agricultural purposes. This means any non-agricultural use of the land, such as commercial or residential development, will disqualify the income from being exempt.
• No Income From Non-Agricultural Activities: Only income that is directly related to agriculture, such as from crops, fruits, or livestock, will qualify for exemption. Income from secondary activities like agro-processing or manufacturing will not be exempt.
• Agricultural Land Must Be Located in India: Income earned from land situated outside India is not exempt from tax.

Situations Where Agricultural Income is Partially Taxable

While agriculture income is generally exempt, there are situations where it may be partially taxable:

• If You Have Non-Agricultural Income: If you have non-agriculture income exceeding the basic limit of exemption of agricultural income will be taken into account for determining the tax slab applicable to your non-agriculture income. This can result in a higher tax rate on your non-agriculture income.
• Income from Agro-Processing or Manufacturing: If you are involved in agro-processing or manufacturing activities that generate income from products that are not purely agricultural, this income will be taxable.
• Agricultural Land Located in Urban Areas: Income earned from land located in urban areas is also subject to taxation in certain cases.

How to Calculate Tax on Agricultural Income

The tax on agricultural income is depends on whether it is exempt or partially taxable. Here’s how you can calculate tax:

• Agricultural Income Exempt: If your total income consists only of AI, it is generally exempt from tax.
• Agriculture Income Plus Other Income: If you have agriculture income and non-agriculture income, the agriculture income is added to your total income. However, the tax will only apply to the non-agriculture portion of your income based on your applicable tax slab.

Example:

• Total agriculture income: ₹5,00,000
• Non-agriculture income (salary): ₹6,00,000
  The agriculture income will not be taxed, but the total income of ₹11,00,000 will be subject to income tax based on the applicable tax slab for the non-agriculture portion.

Documents Required to Prove Agricultural Income

To prove agriculture income, you may need to submit the following documents:

• Land Ownership Documents: These documents show that you own agricultural land. They can include sale deeds, lease agreements, or land records.
• Income Proof: If you are selling agricultural produce, provide proof such as sales invoices or receipts.
• Tax Records: Previous years’ tax returns or income tax assessments for agriculture income, if applicable.
• Bank Statements: Bank statements showing deposits from the sale of agricultural produce.

Common Misconceptions About Agricultural Income Taxability

There are several misconceptions about agriculture Income and its taxability:

• All Agriculture Income is Tax-Free: It is tax-free, but this does not mean that it is entirely exempt from any kind of taxation. It can affect the tax rates on non-agriculture income.
• Rent from Agriculture Land is Always Tax-Free: Rent from agricultural land is exempt from tax only if the land is used for agricultural purposes and located in India.
• Agricultural Income Will Not Affect Income Tax Slabs: It can impact the tax rate for non-agriculture income, particularly if your total income exceeds the exemption limit.

Tips for Filing Returns With Agricultural Income

Here are some pointers for filing returns with agriculture income:

• Keep separate agricultural and non-agriculture income. Keep clear records of agricultural and non-agriculture income. This will help in determining the exact tax liability.
• If your agriculture income is considerable, seek advice from a tax professional to be sure you follow all the rules that govern taxes and file returns accurately.
• Regardless of whether you have agriculture income that is exempt from tax, it is always good to file on time to avoid penalties.

Also Read: Agricultural License A Pathway To Modern Farming In India

Conclusion

Tax treatment of agricultural income is very important to any person engaged in agriculture or farming activities. While agriculture income is generally considered to be free of income tax in India, it is necessary to take note of the conditions under which it qualifies for this exemption and to keep documentation to support this claim. Ensure that you are well-acquainted with the workings of agricultural tax treatment so that you can pass through the maze with utmost ease, seeking professional tax advice whenever necessary.

Frequently Asked Questions (FAQs)

1. Does agricultural income carry exemption from income tax in India?
   Yes, agriculture income is mostly exempt under Section 10(1) of the Income Tax Act, 1961 except for the fact that it affects the taxation of non-agriculture income.
2. What if I have an agriculture income and salary income?
   It is added to your total income but not taxed. The tax is calculated based on your non-agricultural income.
3. Do I get a tax deduction for agricultural expenses?
   Yes, certain agricultural expenses are allowed to be deducted under Sections 80C, 80G, and so forth.
4. How do I prove that I earn agricultural income?
   It can be proven on the basis of documents such as land ownership papers, sales receipts, and bank statements showing deposits of agriculture income.