In our earlier article, we have discussed what is agricultural income, why it’s considered as exempted and example of certain cases in which its considered as exempted income as they derived from agricultural activity.
In this article, we will be discussing step by step procedure to calculate tax liability on your taxable income if part of it is derived from agricultural activity.
You have to include agricultural profit into the total income if following three conditions are satisfied:
- Agricultural income/profit exceed Rs 5,000 for the financial year, and
- Total income, excluding the agricultural income exceeds the basic exemption limit, and
- The taxpayer is an individual, a HUF, BOI, AOP or an artificial judicial person
All the three conditions are to be satisfied.
This means if your gross receipt from agricultural activities is Rs 6,00,000 and the expenses in connection to it is Rs 5,98,000, then aggregation does not apply as net agricultural profit is Rs 2,000, which is less than Rs 5,000.
Please note, that the scheme of aggregation of agricultural profit with other taxable income is not applicable to a company, firm or co-operative society.
If you aggregate agricultural profit with company or Partnership firm’s taxable income, then there will be no effect as companies and firm’s are taxable at a flat rate with no basic exemption limit.
If scheme of aggregation is applicable, then following steps are to be followed to calculate final tax liability.
Calculate agricultural profit. While calculating, you need to calculate it in such a way that as if it’s not exempted. You have to calculate based on the appropriate head of income under which the profit is falling.
For instance, if you have incurred income from your farmhouse, then it has to be calculated under the head house property.
If the income is by selling cultivated goods after ordinary process to make it marketable, then it has to be computed according to the provisions for computation applicable to the head profits and gains of business or procession.
While considering profit as agricultural, you have to check whether all the conditions are satisfied or not.
Net agricultural as derived at step-1 and income from all heads should be aggregated to compute tax liability.
While calculating tax liability, you have to calculate it with the basic rate.
Surcharge, health and education cess are not to be charged at this step.
Net agricultural profit then added to basic exemption limit of the individual that is charged to tax at nil rate.
Tax has to be calculated as if the aggregate amount is the total income chargeable to tax.
Similar to step 2, you need not charge surcharge, health and education cess at this step also.
Subtract tax amount calculated at step 3 from the tax liability calculated at step 2.
On the net amount, you have to add surcharge (if applicable) and health and education cess. The total amount arrived will be treated as final tax liability of the assessee.
Let us understand how to calculate tax when agricultural profit is part of your total income and you are liable to tax through following example.
During the financial year 2017-18, Mr. X has incurred income from following two sources;
- Rs 12,00,000 from salary
- Rs 2,00,000 from agricultural activities.
Here are the steps to calculate tax liability for Mr.X.
Step-1 – Add both income and find out tax liability
Both salary and agricultural profit is added to Rs 14,00,000. Tax liability by assuming that Mr X is below the age of 60 years and does not have any investments to get deduction, comes to Rs 2,32,500.
Step-2 – Add agricultural income to the basic exemption limit to calculate tax liability
Add basic exemption limit of Rs 2,50,000 to Rs 2,00,000 to find out tax liability on the total income. In this case, tax on Rs 4,50,000 comes to Rs 10,000.
Step-3 – Subtract step 2 from step 1
Now, subtract step 2 from step 1 to find out tax liability of Mr X. In our case of Mr X, we need to subtract Rs 10,000 from Rs 2,32,500. Net basic tax to be paid is Rs 2,22,500.
You need to add health and education cess at the rate of 4% to the tax arrived at step-3. After adding health and education cess tax liability for Mr X is Rs 2,31,400 (Rs 2,22,500+Rs 8900).
Please remember, if your net agricultural profit is Rs 5,000 during the financial year, then it’s exempted from tax and you need not aggregate it with your other income to calculate tax. However, for disclosure purpose, you need to show it in your ITR.
You are also required to charge surcharge if its applicable. In our case it’s not applicable to Mr X.
Example – 2
Mr Y who is 40 Years old has provided following details;
- Profit from business – Rs 6,00,000
- Agricultural income – Rs 1,00,000
- Life insurance premium paid – Rs 50,000
Let us calculate tax liability of Mr Y.
Step 1:- business profit + agricultural profit = Rs 6,00,000+Rs 1,00,000 = Rs 7,00,000.
Step 2 :- Tax on Rs 7,00,000 = Rs 12,500 + 20% x (Rs 7,00,000 – Rs 5,00,000) = Rs 52,500.
Step 3 :- agricultural profit + basic exemption limit = Rs 1,00,000 + Rs 2,50,000 = Rs 3,50,000
Step 4 :- Tax on Rs 3,50,000 = 5% x (Rs 3,50,000 – Rs 2,50,000) = Rs 5,000.
Step 5 :- Step 2 minus step 4 = Rs 52,500 – Rs 5,000 = Rs 47,500.
Step 6 :- Charge health and education cess at the rate of 4% on step 5 = Rs 47500 x 4% = Rs 1,900
Step 7 :- Net tax payable = Step 5 + Step 6 = Rs 47,500 + Rs 1,900 = Rs 49,400.
If the net results of computation of agricultural income/profit from various sources is a loss, then the loss will be disregarded and the net agricultural income of the assessee shall be taken as nil.
The net income will always be rounded off to the nearest multiple of Rs 10.
If non agricultural profit does not exceed the basic exemption limit, then aggregation should not be done.
For instance, if profit from business is Rs 1,00,000 and agricultural income is Rs 80,00,000, the aggregation is not applicable as profit from business does not exceed the basic exemption limit of the current financial year in which such income is derived.