Tax on Agricultural Income

Agricultural income earned in India is considered as exempt as per Section 10(1) of the Income Tax Act. However, agricultural income from outside India is rendered taxable. In this article, we review the nuances of tax on agricultural income in India.

Types of Agricultural Income

Agricultural Income is defined in three parts under the Income Tax Act Sec.2(1A) as follows. The type and category of the agricultural income determine the tax codes applicable.

Rental Income from Agricultural Land

If any person has rented out agricultural land, the rent received will be considered as agricultural income. In such cases, the rent received will be tax-exempt and considered to be agricultural income. However, if the amount of rent payable to the landlord was in arrears and the landlord collected interest on the arrears, then in such a case, the interest portion will not be considered agricultural income. Interest earned on arrears on rental income from agricultural land will be considered only as interest income and is taxable.

Income from Agricultural Operations

Income earned from agricultural operations is termed as agricultural income and is exempt from income tax. Further, companies engaged in agricultural operations also enjoy income tax exemption, if the income earned is purely agricultural income, as per the Income Tax Act. Dividends distributed to shareholders by agricultural companies are however not considered to be the agricultural income of the shareholder. Hence, to a certain extent, it will be considered to be his/her dividend income and is taxable. But, if such dividend has been received from a domestic company, it shall be exempt u/s 10(34) and the domestic company will have to pay additional Income-Tax. If the foreign company is conducting agricultural operations in India, its income will also be exempt and if the foreign company has distributed dividend, such dividends will be taxable in the hands of shareholders but the foreign company shall be exempt from Additional Income-Tax. If any partnership firm is involved in agricultural activity, its income will also be considered to be agricultural income and will also exempt from Income-Tax. If such a partnership firm distributed profits to the partners, the profit share received by a partner will be exempt from Income-Tax u/s 10(2A) or it can be considered to be agricultural income u/s 10(1). If any partnership firm is occupied in non-agricultural activities and has paid salary or interest to the partners, the relevant salary or interest is taxable in the hands of the partnership.

Farm Building Income

The farm building is any building in the agricultural field or is very close to the agricultural field and it is utilized for storing agricultural produce or agricultural implements or it is being utilized by the farmer as a dwelling unit. Income from a farm building is called farm building income and tax is

computed as per provision of house property - considered to be Agricultural Income. Additional conditions for classification as farm building income include that the building be in a rural area and if it in the urban area it must be constructed on the land which has been classified as agricultural land.

Partial Integration Method

If a person earns both agricultural and non-agricultural income, then the taxable income is calculated as per the partial integration method. The steps for computing taxable income as per partial integration method is as follows:

Compute income tax on the basis of the total of agricultural income + non-agricultural income without education cess.
Compute income tax on the basis total of agricultural income in addition to exemption limit (Rs.2.5 lakhs currently) without education cess.
Deduct tax at step (2) from tax at step (1) and apply education cess of 3%.

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Frequently Asked Questions

Common questions about Tax on Agricultural Income in India: Rental & Farm Building.

Agricultural income in India is defined under three categories: rental income from agricultural land, income from agricultural operations, and farm building income. The specific details of what qualifies under each category are provided in the article.

Rental income received from leasing out agricultural land is considered tax-exempt agricultural income. However, if the landlord collects interest on any rental arrears, that interest portion will be treated as taxable interest income and not agricultural income.

Dividend income received by shareholders from domestic agricultural companies is exempt from tax for the shareholders under Section 10(34). However, the domestic company will have to pay additional income tax on the distributed dividends. For foreign agricultural companies operating in India, the dividends are taxable for the shareholders.

Yes, if a partnership firm is involved in agricultural activities, its income is considered agricultural income and is exempt from income tax. Additionally, the profit share received by partners from such a firm is also exempt under Section 10(2A) or Section 10(1).

For a building to be classified as a 'farm building' and its income considered agricultural income, it must be located in a rural area or on land classified as agricultural land in an urban area, and it must be used for storing agricultural produce, implements, or as a dwelling for the farmer.

When a person has both agricultural and non-agricultural income, the taxable income is computed using the 'partial integration method'. This involves calculating tax on the total income (agricultural + non-agricultural), and then deducting the tax calculated on just the agricultural income plus the basic exemption limit.

Agricultural income earned in India is fully exempt from income tax under Section 10(1) of the Income Tax Act. There are no specific deductions or exemptions applicable to agricultural income itself, as it is already exempt from tax.

While agricultural income earned within India is exempt from tax, any agricultural income earned from operations outside India is considered taxable income in India.

If a company is involved in both agricultural and non-agricultural activities, the income from agricultural operations will be considered tax-exempt agricultural income. However, any income from non-agricultural activities will be taxable as regular business income.

No, interest income earned on deposits made from agricultural income is not considered agricultural income itself. It will be treated as separate interest income, which is taxable under the Income Tax Act.