Agricultural Income

Agricultural Income – Tax Treatment

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Agricultural Income and it’s Tax Treatment

The definition of agriculture income is given under section 2(1A) of the Income Tax Act, which defines 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 and not only that but also the rent received from the land there of for the said purposes will be treated as agricultural income.
  2. Any revenue received by the cultivator or the owner there of which income is derived from the agricultural produce from that particular agriculture land and receiver of the rent is also exempt.
  3. Any revenue from the farm building is exempt, but only if following conditions are satisfied:
  4. The land is used for the purpose of storage or as a dwelling house.
  5. The land should be occupied by cultivator or the land should be in ownership of it.
  6. The farm building should be in the immediate vicinity of the agricultural and should not be away from the agricultural land.
  7. The farm building must be assessed to land revenue in India.

Examples of Agricultural 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.

Examples of Non-Agricultural Income

  • Income from poultry 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.

Agricultural Income in 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 have to be extra careful while dealing with such income. They 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.

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