Taxation on Agricultural Income in India

Agricultural Income in India is Exempt from Tax under section 10(1) of the Income Tax Act, 1961.

Agricultural Income Includes:

  • Any rent received from land which is used for agricultural purpose.
  • Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
  • Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc.
  • Income earned from carrying nursery operations is also considered as agricultural income and hence exempt from income tax. For the purpose of this clause, any income derived from saplings or seedlings frown in a nursery shall be deemed to be agriculture income.

Provided that:

  1. There must me a land.
  2. The land is being used for agricultural operations, means efforts have been induced for the crop to sprout out of the land.
  3. Land must be cultivated, breeding of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be construed as agricultural operations.
  4. If any rent is being received from the land then in order to assess that rental income as agricultural income there must be agricultural activities on the land.
  5. In order to assess income of farm house as agricultural income the farm house building must be situated on the land itself only and is used as a store house/dwelling house.
  6. Ownership of the building (store house or dwelling house) or land is not necessary, only the operations should be of Agricultural. In some cases, further processes may be necessary to make a marketable commodity out of agricultural produce. The sales proceeds in such cases are considered agricultural income even though the producer’s final objective is to sell his products.
  7. The Land is either assessed to land revenue in India or is subject to a local rate assessed and collected by Government Officers.

Important Note:

If a person just sells processed produce without actually carrying out any agricultural or processing operations, the income would not be regarded as agricultural income. Likewise, in cases where the produce is subjected to substantial processing that changes the very character of the product (for instance, canning of fruits), the entire operations cannot be regarded as agricultural operations. The profit from the sale of such processed products would have to be apportioned between agricultural income and business income. Further, the income from trees that have been cut and sold as timber is not considered agricultural income since there is no active involvement in operations like cultivation and soil treatment.

Certain income which is treated as Agriculture Income;

  • Income from sale of replanted trees.
  • Rent received for agricultural land.
  • Income from growing flowers and creepers.
  • Share of profit of a partner from a firm engaged in agricultural operations.
  • Interest on capital received by a partner from a firm engaged in agricultural operations.
  • Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income;

  • Income from poultery farming.
  • Income from bee hiving.
  • Income from sale of spontaneously grown trees.
  • Income from dairy farming.
  • Purchase of standing crop.
  • Dividend paid by a company out of its agriculture income.
  • Income of salt produced by flooding the land with sea water.
  • Royalty income from mines.
  • Income from butter and cheese making.
  • Receipts from TV serial shooting in farm house is not agriculture income.
  • Income from Plantation.

Certain points to be remembered;

  • Agricultural income is considered for rate purpose while computing tax of Individual/HUF/AOP/BOI/Artificial Judicial Person.
  • Losses from agricultural operations could be carried forward and set off with agricultural income of next eight assessment years.
  • Agriculture income is computed same as business income.
  • If you have only agricultural income, then the income is not taxable. It is fully exempt. For example your total agricultural income is Rs.340000 per year and there is no other source of income. In this case you are not required to pay any tax and file the tax returns.
  • If you have agricultural income and other sources of income, then you are required to file the returns and show the agricultural income. Even if the total income is below the taxable income. For example your agricultural income is Rs.100000 and the income from other sources is Rs.50000. The total income is Rs.150000. For the above scenario you need to file the returns and show the agriculture income.

Judiciary: B.Nagi Reddy v. CIT[2002] 258 ITR 719(Mad.).

Facts: Income from Film Shooting on Agricultural land treatment.

Verdict:

Madras high court held that shooting of film is an activity which is absolutely no nexus with agricultural operation or with the land excepting that shooting is done on the land which may be or has been an agricultural land yielding some agricultural income. It could not be said that the income earned by the assessee by way of shooting-hire charges by permitting the film producers to shoot their films in the garden became agricultural income. Therefore, income earned by assessee was not agricultural income, hence taxable as business income.

Computation:

Although Agricultural Income is exempt from Tax but for Computation of Income Tax, it is aggregated with non-taxable income if;

  1. Assessee is an individual, HUF, AOP/BOI (taxable at normal rates applicable to an individual)
  2. Assessee has non-agricultural income which exceeds the taxable limit.
  3. Agricultural Income exceeds Rs. 5000.

Illustration:

Facts:

  • Assessment Year: 2012-13 (For Slab Rates)
  • Net Agricultural Income: Rs. 86,000
  • Non Agricultural Income: Rs. 12,65,000

In case of an Individual (less than 60 years) or HUF, AOP/BOI

Income Tax on Total Income of Rs. 13,11,000 (1265000 + 86000) 247300
Income tax on Agricultural Income + Maximum Amount not Chargeable to Tax (86000 + 160000) 8600
Income tax Computed at step 1 minus income tax computed at step 2 238700
Add: Education Cess @ 2% and Higher Education Cess @ 1% 7161
Tax Payable (Rounded off) 245860
In Case of Company and Firm 
Simply Tax on Rs, 12,65,000 @ 30% plus Education Cess @ 1% and Higher Education Cess @ 2% (Agricultural Income is not considered in case of Firm and Companies)

Tax Saving Tip

As we have seen in above Illustration, Agriculture Income is not Considered in Case of Company and Firm, So Form a Company or Firm to earn through Agricultural Operations.

FAQ

Ques. Do Interest on arrears of rent qualify as Agricultural Income and will this be exempt from tax?

Ans. Sometimes, a tenant could slip up on rent or revenue payments (either in cash or kind) and have to pay arrears. If the landlord charges interest on such arrears, the income would not be considered agricultural income, but would be deemed income by way of interest and would, hence, be chargeable to tax. While `rent’ presupposes periodical and pre-determined payment (either in cash or kind), `revenue’ implies a sharing arrangement that depends on the actual agricultural produce. In either case, ownership of agricultural land or interest in such land is essential. Which means, the owners of agricultural land, tenants who are given a sub-lease, and people who are mortgagees of agricultural land, all enjoy tax-free agricultural income.

Ques. if agricultural produce is processed to make it marketable at a place other than the agriculture land then amount charged for such processing will be agriculture income or not ?

Ans. Any processing done on Agricultural produce to make it marketable is a part of agricultural operations and such amount recovered will be treated as agricultural income only. Say for example trashing of wheat, mustard, etc is part of agricultural operations only and the amount recovered will be treated as agricultural income only no matter processing takes place on the land itself or some other place.

But in certain cases like in the case of tea, coffee, sugarcane where a major processing is being done then some part of the processed produce (tea, coffee & sugar) is taxed as non-agricultural income and rest is exempt as agricultural income.

Ques. What if agriculture operation is carried on urban land?

Ans. No Matter whether the land is urban or rural agricultural land. If agricultural operations are carried out on land the income derived from sale of such agricultural produce shall be treated as agricultural income and will be exempt from tax.

Ques. If any industrial organisation grow crops and sale half of the goods as raw material in market and remaining further processed and sold as finish goods what will be the tax treatment?

Ans. Agricultural income is exempt from income tax. no matter agricultural operations are done by an industrial organisation or an individual. If any industrial organisation grow crops and sale half of the goods as raw material in market and remaining further processed and sold as finish goods the income earned on first half of produce which is sold in market as raw material is totally exempt from tax.

The second half of the produce which is further processed in this case scheme of presumptive taxation is applicable. Rule 7,7A,7B & 8 of Income tax rules deals with such type of income. Rule 7A deals with Income from manufacture of rubber, 7B deals with Income from manufacture of coffee and Rule 8 deals with Income from manufacture of tea. . Rule 7 deals generally wich says that in cases in which income is partially agriculture and partially from business the market value of the agricultural produce which has been raised by the assessee or received by him as rent in kind and which has been utilised as a raw material shall be deducted from the sale receipts and will be treated as agriculture income. Remaining will be treated as non agricultural income.

Ques. in my agriculture farm I am operating 5 cow in Pune, Maharashtra. this is not by product, only product of milk. So is this income is agriculture income or taxable income? (This milk is sold to dairy product plant in nearest co-op society).

Ans. dairy farming is not an agricultural income.

Ques. Why rent on land treated as agricultural income? what difference is there if the land is in specified area?

Ans. Rent received from agricultural land used from agricultural purpose is treated as agricultural income. This is the law.

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