India is an agricultural economy, meaning most citizens earn their living from producing crops and maintaining farms. As a result, the Government of India (GOI) offers tax benefits to individuals who earn their income from agriculture. This helps to promote growth in this sector and improve the livelihoods of the country’s farmers. However, there are some other forms of agricultural income tax that one might have to pay to the Government. This blog discusses the details of agricultural income tax in India. Read on!

What is Agricultural Income Tax in India?

Agricultural income tax in India refers to any revenue derived from farming or other agricultural-related sources. Income Tax Act, 1961 defines income tax on agricultural income under section 2(1A). As per this income tax section, the agriculture income refers to:

Any form of revenue or rent generated from land used for agricultural purposes in India
Income generated from such land from processing agricultural produce, rent received or any process used by cultivators
Any income generated from farm houses situated in agricultural areas
Money earned from growing seeds and saplings in a nursery

What are the Different Types of Agricultural Income in India?

The different types of agricultural income in India are as follows:

Agricultural Land Rental Income: Agricultural land rental income includes any revenue from renting out agricultural land. If any individual has agricultural land and leases it for agricultural purposes, the Income Tax Department will exempt taxes on that income. However, if the individual receives the rent in arrears, interests earned from the arrears will not be tax-free.
Agricultural Operations Revenue: Agricultural operations revenue is the income earned from various agricultural operations that is tax exempted. This includes:

Income generated from selling replanted trees
Money earned from selling seeds and saplings
Income generated from growing creepers and flowers
Any income an individual earns after selling cultivating and selling his/her produce
Any profit earned by an individual who is a partner at a firm involved in agricultural operations

Farm Building Income: Farm building income includes any and all kinds of revenues generated from renting farm buildings or lands in the form of warehouses. Tax exemption is applicable on such income if the taxpayer earns money from renting buildings near or on agricultural land.

Moreover, the rent receiver or cultivator must occupy the building or use it for agricultural purposes. If the land is situated in an urban location, it must be a certain distance away from the nearest municipality.

Agricultural Income Tax Eligibility Criteria in India

Under Section 10(1) of the Income Tax Act, agricultural income is exempted from income taxes in India. However, there are certain instances where the agriculture income is taxable.

Agricultural operations are subject to indirect taxes under the partial integration of agricultural income with non-agricultural income. It aims to tax non-agricultural income at a higher tax rate. This method applies to individuals, AOPs (Association of Persons), HUFs (Hindu Undivided Family), BOIs (Body of Individuals) and artificial juridical individuals when the following conditions are met:

An individual’s net income should be more than Rs.5,000 in a financial year
Non-agricultural income should be more than the basic exemption limit, and this includes:

More than Rs.2.5 lakh for people who are below the age of 60 and any applicable individuals
If the income of individuals between the age group of 60-80 years is greater than Rs.3 lakh
Income of more than Rs.5 lakh for individuals who are 80 years or older

What is the Importance of Section 54B in Agricultural Tax?

In certain circumstances where the agricultural land is transferred, and the taxpayer receives capital gains, the taxpayer will not have to pay agricultural tax. Under Section 54B of the Income Tax Act, taxpayers who sell their agricultural land to buy another plot of land will be compensated.

To be eligible for these benefits, one must meet the following prerequisites:

The assessee needs to be an individual or a small business.
Agricultural land that the individual is selling or transferring needs to be previously used for farming purposes. Moreover, it could be a short-term or long-term investment for the landowner.
Additionally, the assessee or his or her parents must use the land for two years or more before its transfer.
The assessee needs to purchase another land for agricultural operations within two years from selling the previous agricultural property.

Also Read

List of 11 Tax-Free Income Sources in India (2023)

Income Tax In India: How To E-File, Tax Collection, Advance Tax & More

What is ITR 1 in Agriculture Tax Income?

If your sole source of income is from agriculture, you should report it as agriculture income under the Income Tax Act. You can report your income under ITR 1 under the Agriculture Income column. However, you can only use the ITR 1 Form when your income is below Rs 5000. If your income is more than Rs.5000, you need to use ITR 2 Form to report your earnings.

Things to Keep In Mind for Agricultural Income Taxpayers

Individuals, who are required to pay taxes on the income they make from agricultural operations and processes related to it, should keep the following things in mind:

They should own some farmland if they want their income to classify as agricultural income.
Individuals need to utilise the land for some cultivation activities.
The taxpayer should use the plot of land for agricultural operations. These refer to all processes such as sowing and nurturing seeds, planting, tilling of land, weeding, pruning, harvesting, etc.
An individual, who makes profits from partaking in the above agricultural activities or from selling resulting products on the market, does not have to pay taxes on such agricultural income. If an individual leases agricultural land, the income earned from it will also be deemed tax-free.
The taxpayer should be involved with the agricultural land to be eligible for tax exemptions. They can either be landowners who mortgage the land or cultivators working on the land. In addition, the taxpayers can be tenants or sub-tenants as well.
A taxpayer’s income will not be considered agricultural income if it comes from the processing of a product and not directly from agricultural activities.
Taxpayers who transform their agricultural raw material into something very different will not be deemed to have made agricultural income. For instance, a business owner cultivates fruits and then cans them for overseas sales. Now his income will be considered partially agricultural and partially commercial.
The taxpayer will have 8 years to carry forward all the losses he/she has incurred in their agricultural operations. GOI will consider these losses as an offset against agricultural income.
Individuals involved in the process of timber cutting are not considered to have agriculture income under Income Tax Act as there is no sowing, growing or harvesting involved.

Tax on Income from Agriculture by Selling the Land

If the individual someday decides to sell the agricultural land that he/she owns, the following rules will be applicable:

Before 1970, profits earned from selling or transferring agricultural land were considered rent or revenue from the land. As a result, these profits were considered tax-free agricultural income.
As per the retroactive change that came into existence on April 1 1970, any land that meets certain conditions qualifies as agricultural land. Now, there can be no capital gains from the sale of agricultural land as it does not meet the definition of capital assets.
Any land not included in the above-stated clauses will be deemed a capital asset. Furthermore, as per Section 54B, the proceeds from the sale of these lands will be subject to capital gains tax.

Rebate of Agriculture Income

Individuals are eligible for a complete refund of tax on their agricultural income if the following prerequisites are:

An individual’s total agricultural income should equal or more than Rs. 5,000.
The individual’s sole income should be from agriculture only.
GOI will tax this income if the individual has any additional income source under the non-agricultural sector.

Calculation of Agricultural Income Tax Rebates

As stated earlier, if an individual’s total agricultural income exceeds Rs. 5,000 and he or she also has other sources of income, the agricultural income will be calculated through the following method:

Step 1: You need to calculate your total income, including agricultural income + non-agricultural income (under the latest tax rate).

Step 2: Then, you need to compute your taxes on the total of your basic exemption limits + your agricultural income under the current tax slab.

Step 3: To calculate your tax liability for a particular financial year, you need to multiply the results from steps 1 and 2 to deduce your total tax bill.

Final Word

In India, the Income Tax Act exempts agricultural income tax under Section 10(1), so one can have tax-free income without any limits from this source. However, there has always been a huge controversy as to why the GOI does not tax this sector, unlike income from other sectors.

The GoI does not want to tax the agricultural sector in order to boost the country’s agricultural sector. Furthermore, it also wants to support the oppressed farmers.

FAQs

Q1. Will I have to pay any tax if I own land in an urban area for agricultural purposes?

Ans: If you carry out agricultural operations on the land meant for agricultural purposes, you will be exempted from paying taxes even if the land is situated in an urban area.

Q2. How much tax do I have to pay if I cultivate tea?

Ans: If you cultivate tea, then the Government exempts that process from paying taxes. However, the Government does not exempt the process of packaging those tea leaves into tea bags and eventually selling them commercially.

Q3. Is exporting agricultural implements exempted from taxes?

Ans: No, the Indian Government levies taxes on exporting agricultural tools. Exporting a tool involves many middlemen and also goes through a lot of steps. The GOI levies export duty and GST on exports of agricultural machinery.

Q4. Will the Income Tax department consider my income from poultry farming as agricultural income?

Ans: No, any form of income from poultry farming will not be considered part of agricultural income. Moreover, the Government will levy a certain amount of tax as well.

Q5. What are some sources that the GoI considers non-agricultural income sources?

Ans: Some sources that the GoI considers income from non-agricultural sources are:
Bee hiving
Dairy Farming
Cheese and butter making