More than half of India's workforce is involved in agriculture today, which is a vital part of the country's economy. On the surface, it may appear that agricultural income is tax-free, but it's not so straightforward. Keep reading to learn more about agricultural income and its taxation!
Agricultural Income - Section 10(1)
Agriculture income earned by the taxpayer in India is not taxable according to the Section 10(1). The definition is very wide and covers the income of not only the cultivators but also the land holders who might have rented out the lands. Agricultural income may be received in cash or in kind. In the Income-tax Act, Section 2(1A) defines agricultural income as:
Agricultural income may arise in any one of the following three ways:-
- Rent or Revenue derived from land located in India that is used for agricultural purposes. In this case following three conditions have to be satisfied for income to be treated as agricultural income:
- Rent or revenue should be derived from land;
- Land has to be situated in India (If agricultural land is situated in a foreign country, the entire income would be taxable); and
- Land should be used for agricultural purposes.
Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. However, it must be a process ordinarily employed by the cultivator or receiver of rent in kind and the process must be applied to make the produce fit to be taken to the market which includes thrashing, winnowing, cleaning, drying, crushing etc. The produce must retain its original character in spite of the processing unless there is no market for selling it in that condition. However, if marketing process is performed on a produce which can be sold in its raw form, income derived therefrom is partly agricultural income and partly business income.
Similarly, if other agricultural produce like tea, cotton, tobacco, sugarcane etc. are subjected to manufacturing process and the manufactured product is sold, the profit on such sale will consist of agricultural income as well as business income. That portion of the profit representing agricultural income will be exempted. The Income Tax has prescribed rules to make this bifurcation regarding agricultural and non-agricultural produce for products like tea, coffee, rubber, etc.
- Lastly, agricultural income may be derived from any farm building required for agricultural operations subject to some conditions mentioned in Section 2(1A). In addition, any income derived from the sale of saplings or seedlings grown in a nursery shall be considered agricultural income.
How much agricultural income is exempt from income tax?
Agriculture income is tax-free in the following cases:
- You have net agricultural income of less than ₹5000
- Your only source of income is the income from agricultural land
- You have both agricultural income and other income and the total income excluding such agricultural income is less than the basic exemption limit.
The basic exemption limit for Individuals under 60 years of age is ₹2,50,000, for Individuals above 60 years age is ₹3,00,000 and for individuals above 80 years age is ₹5,00,000
The tax liability shall be computed as follows if above-mentioned conditions are NOT met.
This concept is known as partial integration of agricultural income with non-agricultural income. It is applicable to individuals, HUF, AOPs, BOIs and artificial juridical persons.
Two conditions which need to be satisfied for partial integration are:
- The net agricultural income should exceed ₹5,000 and
- Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e., ₹5,00,000 for resident super senior citizens, ₹3,00,000 for resident senior citizens, ₹2,50,000 for all others).
It may be noted that aggregation provisions do not apply to company, LLP, firm, co-operative society and local authority. The object of aggregating the net agricultural
income with non-agricultural income is to tax the non-agricultural income at higher rates.
The tax liability shall be computed as follows:
- Step 1: Let “X” represent agricultural income and “Y” represent other income. The tax calculated based on X+Y = B1
- Step 2: Let “A” represent the basic exemption slab for income tax payment. The tax calculated on A+X = B2
- Step 3: The actual income tax payable = B1−B2
- Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be reduced by the rebate, if any, available u/s 87A.
- Step 5: Thereafter, it would be increase by health and education cess @4%.
We have seen above that agricultural income is exempt, whether it is received by the tiller or the landlord. However, non-agricultural income does not become agricultural merely on account of its indirect connection with the land.
What are the ways to save taxes on capital gain on the sale of agricultural land?
There are many questions about how to save taxes on capital gains from selling or inheriting a parent's agricultural land.
In some cases, when you sell Agricultural Land – it may be entirely exempt from Income Tax or it may not be taxed under the head capital gains. These are
- The agricultural land in the rural areas of India is not considered a capital asset. As a result, any gains on its sale are not taxable under Capital Gains.
- Are agricultural lands part of your stock portfolio? In the event that you are buying and selling land for the purposes of your business or in the course of your profession, then any gains from its sale may be taxable under the heading Business & Profession.
- Capital gains on compensation received during compulsory acquisition of urban agricultural land are exempt from taxation under section 10(37) of the Income Tax Act.
Let’s check out the exemptions available on capital gains earned from the sale of agricultural land.
Section 54B Conditions for Claiming Exemption from Capital Gains
- Only Individuals and HUFs are eligible for the exemption.
- The agricultural land should be used by the individual or his or her parents for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred. In case of HUF, the land should be used by any member of HUF.
- After the transfer of this land, another piece of land should be acquired for agricultural purposes within two years.
- Purchases of new agricultural land for capital gains exemption cannot be sold within three years of their purchase.
- For those who cannot purchase agricultural land before the date of furnishing their Income Tax Returns, their capital gains must be deposited as per the Capital Gains Account Scheme, 1988, in any branch (except rural branches) of a public sector bank or IDBI Bank. It is possible to claim an exemption for the amount deposited.
- Amounts deposited under Capital Gains Account Scheme that were not used to purchase agricultural land are treated as capital gains in the year that follows the expiration of the 2-year period following the sale of the land. In this case, you are free to withdraw these amounts for any purpose you like.
Amount of Exemption
- Capital gains are completely exempt if the cost of new agricultural land purchased exceeds the amount of capital gains.
- Whenever new agricultural land is purchased at a lower cost than the amount of capital gains:
- The capital gains − (minus) the cost of the new agricultural land = the taxable capital gains.