India is considered as one of the agrarian country in the world. Majority of rural population is actively involved in Agricultural activities. So lets know the Tax Treatment of Agricultural Income in India under Income Tax Act.
As per Section 10(1) of Income Tax Act, "Agricultural Income of a Tax Payer is exempt from Tax". But now question arises, what is considered as agricultural income under Income Tax Act?
You can also watch this video on Tax treatment of Agricultural Income:
What is Agricultural Income under Income Tax Act?
Agriculture Income is defined under section 2(1A) as:
(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.
Some points to be noted for Income to be considered as an Agricultural Income
Agriculture Land must be in existence, ownership is not necessary. Income derived from Agricultural activities carried on leased land will also be considered as an Agricultural Income.
Agricultural land must be used for agricultural activities. If income derived from other activities on Agricultural Land then such Income will not be considered as an Agricultural Income. e.g. Agricultural Land leased out for social events or gatherings, such rental income will not be considered as agricultural income.
Mere selling of Agricultural Product will not be considered as Agricultural Income. e.g. Selling of Grains by wholesaler or retailer will not be considered as Agricultural Income.
Processing activity that changes the entire form or characteristics of Agricultural Product will not be considered as Agricultural Income. e.g. Making Mix Fruit Jam from fruits or manufacturing of Tomato Ketchup from Tomatoes.
Income derived from selling of teak woods is not an Agricultural Income
Consideration received from sale of Agricultural Land will not be considered as agricultural Income. [Will be considered under the head Capital Gain (sec 54B)]
Is Agricultural Income completely exempt?
Agriculture Income is exempt under Sec10(1), but it will be considered for a rate purpose, if:
Net Agricultural Income exceeds Rs.5,000/-, and
Total Income excluding Agricultural Income is more than the basic exemption limit.
(Note: Agriculture Income up to Rs.5,000/- is fully exempt, and above 2 conditions are applicable to Individual and HUF only thus agricultural Income earned by Firm and Company is fully exempt)
Lets see an Example to know the Tax treatment of Agricultural Income
Tax Treatment of Agricultural Income in case of Individual having Agricultural Income more than Rs.5,000 and Total Income exceeds basic exemption limit.
Steps to calculate Tax on Agricultural Income:
Mr. Ramesh has Total Income from different sources Rs.8,00,000/- (excl. agriculture Income) and Agricultural Income is Rs.2,00,000/- in AY 2020-21 (FY 2019-20)
Add agriculture Income to total Income and calculate Tax:
Rs.8,00,000 + Rs.2,00,000 = Rs.10,00,000/-
Tax on Rs.10,00,000/- = Rs.1,12,500/- (as per slab rates for AY 2020-21)
Add agriculture income to basic exemption limit under Income tax:
Rs.2,50,000 + Rs.2,00,000 = Rs.4,50,000/-
(Basic exemption limit for AY 2020-21 is Rs.2,50,000/-)
Tax on Rs.4,50,000/- = Rs.10,000/- (as per slab rates for AY 2020-21)
Difference of Tax calculated in Step 1 & Step 2
Rs.1,12,500 - Rs.10,000 = Rs.1,02,500/-
Add: Cess (4% of rs.1,02,500) = Rs.4,100/-
Total Tax Liability = Rs.1,06,600/-