Section 2(1A) of income tax act 1961 defines agricultural income. As per section 2(1A)(a), to classify an income as agricultural, you need to see if it satisfy following two conditions;
- Income should be derived from land situated in India, and
- the land is used for agriculture purposes
This means profit derived from any land situated in India through agriculture will be treated as agricultural income.
If you have profit from a foreign agriculture land then exemption under section 10(1) will not be available and based on your residential status it will be taxable.
Agricultural income derived from land
As per the terms of section 2 (1A) (b), any income derived from land by,
- agriculture; or
- any process ordinarily employed to render the produce fit for the market or by sale of such produce by a cultivator or receiver of rent in kind;
will be treated as agricultural income only if the land is situated in India and used for agriculture purpose.
Here is a list of certain cases which is treated as agricultural income based on section 2(1A)(a) and (b):
- Rent from land used for agriculture
- Fees collected from owners of cattle for grazing.
- Amount received by selling agriculture produce
- Profit derived by the process ordinarily employed to render the agricultural produce fit for the market and sale
- Interest on capital, salary , bonus, commission or any remuneration to partners from a partnership firm engaged in agriculture operations.
- Sales of seeds, bamboo and plants grown in your agriculture land.
- Saplings or seedlings grown in a nursery – Explanation 3 to section 2(1A).
Income From Farmhouse or any building on agricultural land
Many Indians have farmhouse used primarily for agriculture activities. In such cases profit from a farmhouse can be considered as agricultural income if conditions to section 2(1A)(c) is satisfied.
As per the terms of section 2(1A)(c), if following conditions are satisfied, then any profit derived from a farmhouse or building will be treated as agricultural income and as such it will be exempted under section 10(1):
- The building is on or in the immediate vicinity of the agricultural land situated in India and used for agriculture purpose.
- The building is occupied by the cultivator or receiver of rent or revenue
- The building is used as a dwelling house or store-house or out-house; and
- the agricultural land in which the building is situated is assessed to land revenue in india. If it’s not assessed to land revenue, then it’s not situated within the specified area.
What is Specified area
Specified area means, any area which is comprised:
- within municipality or municipal corporation or notified area committee or town area committee or town committee or cantonment board etc which has a population of not less than 10,000, or
- any area within the distance, measured aerially –
- Not being more than 2 kilometers, from the local limits of any municipality or cantonment board referred in item above and which a population of more than 10,000 but not exceeding 1 lakh, or
- Not being more than 8 kilometres, from the local limits of any municipality or cantonment board referred to in item above and which has a population of more than 10 lakh.
As per explanation 2 to section 2(1A), any profit derived from a farmhouse or building as discussed above will not be regarded as agricultural income if the purpose of using it is other than agriculture.
For instance, if you have received rent by using the farmhouse for residential purpose, then such income shall not be considered as agricultural income.
Similarly, charges received for shooting films in a agriculture land can not be considered as agricultural income.
Transfer of agriculture land will not be considered as agricultural income. Based on the location of such agriculture land, you need to see if capital gain tax is applicable or not.
Rubber, coffee and tea grown and manufactured are treated differently in tax law.
If you are confused whether your profit will be considered as agricultural or not, we suggest you to consult a tax expert and file your tax return on or before the due date of filing.