How agricultural income is taxable in India

Agricultural income is exempted in India. The power to levy tax on agricultural income is with the state government. Central government cannot impose tax on it. For this reason, under section 10 (1) of IT act it has been specifically said that agricultural income will not form part of the total income and as such will be exempted from tax.

In the finance act, it has been stated that for calculating tax applicable to a tax payer, agricultural income will be aggregated with the non agricultural portion. You need to follow the following steps;

• Step 1 – Find out your agricultural income
• Step 2 – Find out non agricultural income
• Step 3 – Add both step 1 + step 2
• Step 4 – calculate tax on step 3
• Step 5 – Add step 1 with the basic exemption limit (for assessment year 2013-2014 and 2014-2015 the basic exemption limit is Rs. 2, 00,000)
• Step 6 – Calculate tax on step 5
• Step 7 – Subtract step 6 from step 4 to get your net tax payable

While calculating tax payable in step number 4 and step number 6 you need not add surcharge to it. After deriving tax payable at step number 7 you need to calculated surcharge on it. Both surcharge and tax calculated at step number 7 should be your tax liability.

Even though agricultural income is exempted under IT act, in actual practice that is not the case. If a salary employee is chargeable @20% then this addition of agricultural profit may take him to get charged @30% and he need to pay more tax. 

Aggregation is applicable to all types of persons i.e. an individual, HUF, company, firm, AOP, BOI etc. For certain types of person like company, limited liability partnership firm, partnership firm etc income is chargeable at a flat rate by which aggregation will have no impact on tax liability. Whereas for individual, HUF and others whose tax rates are based on different slab rates may end up paying higher tax because of this aggregation.

What is agricultural income in India

We have seen the taxation part of agricultural income. Now we have to look into the details which will be considered as agricultural income in India.

Agricultural income has been defined in section 2 (1A) of IT act. According to section 2(1A) followings will be treated as agricultural income.

1. any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
2. any income derived from such land by agriculture or the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or by sale of such produces by a cultivator or receiver of rent-in-kind;
3. Income received from a building situated near or surrounding the agricultural land will be treated as agricultural income if following conditions are satisfied;

• Such building should be occupied by the cultivator or received of rent or revenue
• Building is used for dwelling house or a store house or out-building
• The land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officer. Where the land is not subject to these then the land should not be situated within the area as specified by government

Also Read: Definition of agricultural income as specified in IT act.

What is the area specified by the government

If the land is situated within the specified area as mentioned under section 2(1A) of the IT act then such land will be considered as agriculture land.

Followings areas are specified by the government;

• area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand [according to the last preceding census of which the relevant figures have been published before the first day of the previous year] ; or
• in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.
  • in any area within the distance, measured aerially,—

(I)  Not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or

(II)  Not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or

(III)  Not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten lakh.

Other relevant points

• Any amount derived from sapling or seedling grown in a nursery shall be deemed to be agricultural income.
• Agricultural income received from an agricultural land situated outside India will be taxable in the hands of resident as such land will not be treated as agricultural land in India. Section 2(1A) specifically mentioned the land will be treated as agricultural land only if such land is situated in India.
• If agricultural income does not exceed Rs. 5, 0000 then you need not add it to your non agricultural portion.
• You should not aggregate agricultural income with non agricultural if your non agricultural portion is less than the basic exemption limit.
• Non agricultural portion should be added after giving effect to IT deduction available to the assessee.