Agricultural Income Tax

Indians are said to be primarily engaged in agriculture. It is usually said to be the only source of income for the huge rural population in India. For its basic food needs, the country as a whole is completely dependent on agriculture. One of the government’s policies is an exemption from income taxes, which is one of the many schemes and policies it has in place to promote growth in this sector. Taxation of agricultural income is more complicated than the fact that it is not subject to income tax. So let’s see what is agricultural income and income tax on agriculture.

Agricultural Income Tax: Definition and Meaning

Agricultural income in India means a combination of income and revenue obtained from sources such as land, buildings built on land, or associated with agriculture, or products produced from horticulture. This gives the agricultural income meaning.

The Income Tax Act of 1961 defines agricultural income under section 2(1A). The term agricultural income is generally understood as Land used for agriculture that is owned by or leased to the individual. Amounts derived from such land from farming operations, such as processing of produce for sale or use in markets. Section 2(1A) specifies certain conditions necessary to determine the amount of income that can be gained from the sale of a farmhouse or house farming in. The house farming meaning in Malayalam is veettu krishi. And the house farming Malayalam meaning veettu krishi is widely used in Kerala. Seedlings or saplings grown in a nursery are considered agricultural income. And these define the agricultural income and on what basis they are understood.

Rent or Revenue Generated from Agricultural Land

It is clearly said in the Agricultural Income-tax Act of 1961 that any rentals or revenues accruing from the agricultural land parcel in the country and used for any purposes of agriculture, will not pay any rental/revenue-based taxes although some conditions will have to be fulfilled.

Income by the way of rent of agricultural land is based on the following: 

1. Either a local rate be assessed and collected in India or a land revenue assessment and collection be made by government officers.
2. The land should be kept out of municipalities or cantonments with more than ten thousand residents, or further inland not to be assessed local rates:
   • A distance of over 2 km, More than 10,000 people but not more than 1,00,000. Distances not exceeding 6 km, More than 1,000 people but no more than 10,00,000. Residents living in a municipality or cantonment board;
   • The distance should not exceed 8 km. More than 100.000 people live in a municipal or cantonment board within their local limits.
3. Land transfer income cannot be included in the revenue.

Furthermore, the agricultural land should be directly related to the receipt of income by way of rent or revenue.

Income Derived from Agricultural Land

Profit generated from agricultural operations conducted on such land, including processing of agricultural products raised or received as rent-in-kind, or by the cultivation of crops so that they can be marketable, or by selling them. And the amount of tax on agricultural land will be based on this.

Income from Farm Building Required for Agricultural Operations

If the assessed income derives from the building he or she owns and occupies or from his or her land, the income is exempt from tax: In order for the building to be constructed on the land, it must be within walking distance.

In connection with the land, the assessee must use it as a dwelling house, a storehouse, or an outbuilding. We can therefore assume that income derived from a farm is an agricultural income if it meets the conditions listed above.

Buildings are normally taxed as ‘income from the property based on their annual value. A farmhouse, on the other hand, would fall under agricultural income and, thus, would not be taxed.

Income derived from saplings or seedlings grown in a nursery

A nursery’s earnings from the sale of saplings or seedlings shall be considered agricultural earnings.

Things that Determine an Income as Agricultural Income

The following points have to be considered when determining whether an income is an agricultural income

• The existence of land.
• Land used for agricultural operations: Agriculture involves the efforts necessary to ensure that a crop sprouts from the land. Agricultural income includes the income derived from agricultural operations, including processes undertaken to make products ready to be sold. A cultivator or recipient must perform agricultural operations on the land in order to be exempt from tax on rent and revenue from arable land and income earned by selling produce.
• Cultivating Land is a Must: Land used for agriculture must be cultivated to some degree. Agribusiness encompasses all land production, including crops, trees, and groves as well as commercial crops, plantations, and grasslands. Nevertheless, livestock farming, aquaculture, dairy farming, and poultry farming on agricultural land cannot be considered agricultural operations.
• Rent and revenue may be tax-free even if there is no ownership of the land: A mortgagee or an owner of land may be eligible for tax-free income, but not if the assessee has any interest in it (such as a lease). Agriculture, however, does not require the owner to be the cultivator. It is possible that he is an owner or a sub-tenant. Therefore, all landowners are agriculturalists, exempt from taxation. A commodity may need to be further processed to be marketed out of agricultural production in some cases. A producer’s final objective is to sell his products, so the sales proceeds in such cases can be considered agricultural income.

Some Notes Related to Agricultural Income:

• Rate calculation for Individuals, HUFs, AOPs, BOIs, and Artificial Judicial Persons takes into consideration agricultural income and the casual income from income tax.
• It is possible to carry forward agricultural losses and deduct them from income for the eight assessment years ahead.
• Business income and agricultural income are computed similarly.
• And the agricultural income is exempt under section 10.

Agricultural Income Exemptions

• Generally, processed foods sold to consumers are not considered agricultural income if they don’t involve any agricultural or processing activities.
• Similarly, in situations where the product undergoes extensive processing that significantly alters its very nature (e.g., canning of fruits), the entire operation is not considered an agricultural activity. Agricultural income and business income will need to be split equally between such processed products.
• Since there is no active involvement in operations such as cultivation or soil treatment, trees that have been cut and sold as timber are not considered agricultural incomes.

Non-Agricultural Income

Non- Agricultural income comes under the types of agricultural income. The following are some of the examples of non-agricultural income:

• Poultry farming income.
• Beehive income.
• The income from agriculture that an organization pays as dividends.
• Amount received from the sale of trees that grew spontaneously.
• An agricultural company paid a dividend to its shareholders
• Broker commissions from agricultural produce sales
• Produced from salt after a coastal area has been flooded by seawater.
• An acquisition of standing crops.
• Mining royalties.
• Cheese and butter are produced from this source.
• Documents related to the shooting of a TV serial in a farmhouse

All of these come under the non-agricultural activities that provide the non-agricultural income.

Taxation on Agricultural Income

The most frequently asked question is agricultural income is taxable or not? Yes, agricultural income is taxable. A direct tax on agricultural income is not provided. The IRS does not consider agricultural income to be an income source under Section 10(1) of the Income Tax Act. The Union Government does not tax income generated from agriculture. All the incomes of agriculture like partly agricultural income, annual income together makes the taxation.

On the other hand, agricultural income is subject to an indirect tax. State governments are well within their rights to levy a tax on agricultural income, even though the government at the center cannot tax the income directly. According to the latest amendment, the State Government is allowed to levy tax on products and services above the exemption rate, which is Rs 5,000 per fiscal year.

A combination of agricultural and non-agricultural revenue would make up the total tax, as per the Finance Act. Non-agricultural income is taxed more heavily under the Income Tax Act. Individuals, companies, and BOIS must use this method when calculating their taxes. LLPs, corporations, and other legal entities are excluded.

Formula to Calculate Tax Liability

The word taxable meaning is liable or to be taxed. The Income Tax Act, 1961 exempts agricultural income in income tax under section 10(1). When both of the following conditions are met cumulatively, however, it is included in determining the rate. Let’s see how agricultural income tax calculation is done and on what basis this is done. And before calculating you should be able to define total income.

• The total agricultural income in P.Y. exceeded INR 5,000.
• A total income of more than INR 2,50,000/- includes net agricultural income.

For those who fall within the 60 to 79-year age bracket during the P.Y., the condition at Serial No.2 changes to INR 3,00,000/-. Assessees who are 80 years of age or over during the P.Y. may be taxed at INR 5,00,000/-; otherwise, they are taxed at 10%.

The Tax liability will be computed using the following methods once the previous conditions are met:

When calculating your income tax liability, include the Agricultural income. For example, suppose a taxpayer has an annual income of 7,50,000/- annual income in Hindi is vaarshikaay (वार्षिकआय) and a Net Agricultural income of 100,000/-. In this step, tax is calculated as follows: INR 7,50,000/- plus INR 1,00,000/- = INR 8,50,000/-. For example, an individual who is under 60 years of age during a P.Y. will have income tax amounts of INR 82,500/-.

Then, to the net agricultural income, add the applicable tax slab benefit, as appropriate. The additional benefit to a person below the age of 60, calculated based on the tax slab benefit, will be INR 2,50,000/-, which we will add to the INR 1,00,000/-. To determine income Tax, we will multiply INR 3,50,000 by 2,50,000 tax slab benefit (and net Agricultural income of 1,00,000). INR 10,000/- shall be the amount of Tax. Section 101 of the income tax act clearly says about investments and funds.

Subtract in the third step from the Tax in the first step the Tax computed in the second step = INR 72,500/-. As a result, the tax liability will vary depending on how education levy, deductions, etc. are applied.

Tax on Sale of Agricultural Land

What is the tax on sale of agricultural land? Sale of agricultural land taxability- Profits from agricultural land sales or transfers prior to 1970 were considered rent or revenue. The capital gain on agricultural land generated by such profits was thus exempt from taxation. A number of high courts have rendered favourable judgments on the issue. The Land Act of 1973, however, dated as of April 1, 1970, amended the provisions related to determining whether land is agricultural land. In the event of the sale of such land, there will be no capital gains. Agricultural land does not qualify as a capital asset. Taxing meaning in Hindi is chungee or Kar.

All other lands not falling within the above categories will be considered capital assets and sold for capital gain on sale of agricultural land will be taxed under Section 54B, which is explained in further detail below.

Capital gains on the sale of agricultural land are exempt from taxation in certain situations under Section 54B. Taxpayers who sell agricultural land and purchase new agricultural land receive relief under Section 54B. If the following conditions are met, the following benefits may be claimed:

• Individuals or HUFs must qualify as assessees.
• Agriculture should have been carried out on the agricultural land. An asset could be short-term or long-term.
• During the two years immediately preceding the transfer of land, the assessee or either of his parents must have been using it as a farm.
• In order to be eligible for return of capital, an assessee should be acquiring another land in the agriculture category within a period of 2 years from the sale date of the first land.

Tax on Land Sale by NRIs in India

If you sell a property after holding it for a long time, your tax liability will vary. The long-term capital gains tax is imposed when you sell a property that you’ve owned for longer than two years. Short-term capital gains tax must be paid on a property held for less than two years. The agricultural income received from outside India will be accounted for on the following basis:

• Capital gains made over the long term are taxed at 20%
• According to your income bracket, short-term gains will be taxed

A capital gain is your profit minus your expenditures on the sale, less the acquisition price.

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