Agricultural Income Tax Treatment / Taxability

• Renting/leasing agricultural land for agriculture, storeroom, residential place and outhouse.
• Money earned from trees growing in nurseries as seedlings or saplings.
• Renting/leasing agricultural land for by cultivator or farmer.
• Any income due to commercial use of agricultural land.
• The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed.

A few exclusions to this income will be as follows:

1. Income should be from an existent piece of land.

1. Income should be from a piece of land that is used for agricultural operations.

1. Income should stem from produce achieved after cultivation of the land.

1. Income can be from a land that is not under the assessee’s ownership.

Key points to remember while considering if an income is actually a valid agricultural income:

• Income should be from an existent piece of land
• Income should be from a piece of land that is used for agricultural operations
• Income should stem from produce achieved after cultivation of the land
• Income can be from a land that is not under the assessee’s ownership

Is Agricultural Income Taxable?

By default, agricultural income is exempted from taxation and not included under total income. The Central Government can’t impose or levy tax on agricultural income. The exemption clause is mentioned under Section 10 (1) of the Income Tax Act of India.

Central Government

The Central Government can’t impose or levy tax on agricultural income. The exemption clause is mentioned under Section 10 (1) of the Income Tax Act of India.

State Government

State Governments can charge agricultural tax. As of the latest amendment, income from agriculture, if within INR 5000 in a financial year, will not be accounted for tax purposes. Anything above that will be taxable as per the applicable rates. As per the finance act, the total tax liability for a person would include the agriculture income added to the non-agricultural portion.

1. Income above Rs.5,000: Though exempted from tax through Section 10 (1), tax on agricultural income persists at the state level if the mentioned income exceeds INR 5000 per year and if the total income excluding agricultural income is more than the basic exemption limit.

1. Basic threshold: In addition to net agricultural income, total income is higher than the basic exemption threshold.

1. For firms, non-individuals and companies:  They can pay the associated tax as the tax is charged at a flat rate on the chargeable income.
2. For salaried individuals: Agricultural tax might increase the tax they need to pay because of the aggregation of income.

Calculation of Tax taking Agricultural Income into Account

In case the agricultural land is not falling under the scope of the aforementioned section, one would need to do a separate evaluation just for that aspect of tax. If the agricultural income is well within INR 5000, the returns need to be filed through ITR 1, else ITR 2 needs to be used wherein there is a separate column for declaring the details of the income.

The tax calculation done here is in accordance with the fact that the income from agricultural sources is falling under Section 2 (1A) of the IT Act.

Formula for calculating tax Total amount of tax due

For all other normal purposes, the tax calculation will involve the following steps:

1. Including the Agricultural Income – Considering B is the base income of the individual and A is the agricultural income, tax first needs to be computed on the amount of B+A. Let’s call this tax as T(B+A)
2. Adding the basic tax slab benefit – Depending upon changes in the Income Tax rules, the basic tax slab might change, but for clarity’s sake, let’s consider that as S. That needs to be added to the agricultural income and another tax is be calculated on the amount. Let’s call this tax as T(S+A)
3. Income Tax liability – This is the tax that is subject to deductions. Thus IT = T(B+A) – T(S+A)

One should always remember to aggregate the agricultural income while calculating tax since that can allow one to avoid unnecessary extra taxes or interest on taxes.

Tax Benefit Under Section 54B ITA, 1961

Under section 54, any individual or HUF may claim a tax benefit (B). The benefit is for taxpayers who sell their agricultural property and then purchase an additional agricultural property. The following criteria must be met for this tax benefit:

1. Applicable to individuals
2. The land must be used for agricultural purposes (either by the applicant or their parents) for at least 2 years before the land was sold.
3. Applicable to HUFs

1. The land must be used for agricultural purposes for at least 2 years prior to the sale of the land. Any member of the HUF must use the land in the case of the HUF.
2. Within two years of the sale of the prior land, the taxpayer is required to buy new agricultural land.

Documentation for Agricultural Income

Even though no tax must be paid for agricultural income, relevant documents must be submitted and they are mentioned below:

1. Proof of Expenses: Records of any farming expenses such as operational costs, labour charges, and fertilisers.

1. Bank Statements: Proof that you have earned money from agricultural activities.

1. Sale Receipts: Documents showing sale of agricultural produce and crops.

1. Land Documents: Lease or ownership proof of agricultural land.