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Agricultural Income – Income Tax Act


Agricultural Income – Income Tax Act

Agricultural Income is exempt from the levy of Income Tax in India. However, when a taxpayer has agricultural income, the rate at which the assessee pays tax on non-agricultural income depends on the quantum of agricultural income. As per Entry no. 46 in the State List of the right to collect taxes on agricultural income lies with the states. Hence, the implication is that the Central Government does not have the power to levy taxes on agricultural income. The Government of India observed that taxpayers were earning a massive amount of agricultural income which was exempt from taxation under the Act. At the same time, the taxpayers were having other income, which was also availing of exemption under the Act on account of availability of the basic exemption limit. To address the situation, the Government introduced an alternative method of taxing agricultural income. Under the method, agricultural income is used to determine the tax slab which applies to the taxpayer. The method should be used irrespective of the accounting methods used by the assessee. In this article, the method of calculating the tax liability of an assessee who has agricultural income has been explained.

Meaning of Agricultural Income

The definition of agriculture income is given under section 2(1A) of the Income Tax Act. The section mentions that any income from the following sources will be treated as agriculture income:

  1. Any revenue from the land which is situated in India and which is used for agricultural purposes is exempt. Further, the rent received from the land will be treated as agricultural income. However, to satisfy this condition, the person to whom the land is given on rent should use the land for exclusively agricultural purposes.
  2. Any revenue received by the cultivator or the owner of the land which falls under the category of income derived from the agricultural produce from that particular agriculture land is also exempt.
  3. Any revenue from the farm building is also exempt, but only if the following conditions are satisfied:
  • The land is used for the purpose of storage or as a dwelling house.
  • The land should be occupied by the cultivator or the assessee should be in ownership of it.
  • The farm building should be in the immediate vicinity of the agricultural land and should not be distant from the agricultural land.
  • The farm building must be assessed to land revenue in India.

Examples of Agricultural Income

  • Income from the sale of replanted trees.
  • Rent received from sub-letting 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 the sale of seeds.

Examples of Non-Agricultural Income

  • Income from poultry farming.
  • Income from bee hiving.
  • Income from the sale of spontaneously grown trees.
  • Income from dairy farming.
  • Purchase of standing crop.
  • Dividend paid by a company out of its agriculture income.
  • The income derived from salt produced by flooding any portion of the agricultural land with seawater.
  • Royalty income from mines.
  • Income from butter and cheese making.
  • Receipts from a television serial shooting in a farmhouse.

Procedure for Tax Computation

Although agricultural income is fully exempt from tax, the Finance Act, 1973, introduced a scheme whereby agricultural income is included with non-agricultural income in the case of non-corporate assessees who are liable to pay tax at specified slab rates. The process for income tax computation for such assesses is as follows:

  1. Income tax is first calculated on the net agricultural income plus the assessee’s total income from non-agricultural sources.
  2. Income tax is then calculated on the basic exemption slab increased by the assessee’s net agricultural income.
  3. The difference between (a) and (b) is the amount of tax payable by the assessee. This process of computation is, however, followed only if the assessee’s non-agricultural income is in excess of the basic exemption slab.

Clearly, despite agricultural income being tax-exempt, assessees should be cautious while dealing with such income. Taxpayers must make sure that they aggregate agricultural income with their total income to avoid interest payments and possible penalties for concealment of income. Assessees must also maintain credible records to provide the tax authorities with proof of ownership of agricultural land and evidence of having earned agricultural income.

To know more about the concept of Tax Audit Turnover in Income Tax, click here.