Income tax on agricultural income easily explained by TaxHelpdesk

Income Tax on Agriculture Income Easily Explained By TaxHelpdesk

Agricultural income is the primary source of income for most Indians. Further, the income from agriculture is not taxable under Section 10(1) of the Income Tax Act.

What is agricultural income?

Section 2(1A) of the Income Tax Act clearly defines the term “agricultural income”. Accordingly, this Section points out the following three sources of agriculture income:
Firstly, revenue is generated through rent or lease of land in India that is used for agricultural purposes
Secondly, revenue generated through the commercial sale of produce gained from an agricultural land
Lastly, revenue is generated through the renting or leasing of buildings in and around the agricultural land.

Also Read: Know Reasons Why You Should File Your Income Tax Return

The last condition, is, however, subject to the following conditions

  1. The cultivator or farmer should have occupied the building, either through rent or revenue
  2. The building use is for a residential place, storeroom, or outhouse
  3. The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed

What is not an agriculture income?

Now one should note that not every income wrt agricultural land will be an agriculture income. There are a few exceptions to it. Therefore, the following incomes are not agriculture incomes:

Firstly, revenue from the sale of processed produce of agricultural nature without actual agricultural activity
Secondly, revenue from extremely processed produce
Thirdly, revenue from trees that have been sold as timber

Therefore, income from poultry farming, bee hiving, fisheries, dairy farming, etc is not an income from agriculture.

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How to determine whether income is an agricultural income or not?

The income is an agriculture income if the income is from
– Existent piece of land
– Piece of land useful for agricultural operations
– Achievement of produce is from the cultivation of the land
– Land that is not under the assessee’s ownership

So, any income apart from the above income is not an agricultural income.

Also Read: A Quick Look At Deductions Under Section 80C To Section 80U

Income Tax on Agricultural Income

As stated above, there is no tax applicable on income from agriculture. However, the State Government can charge agricultural tax. Accordingly, as per the latest amendment, if the agricultural income is above Rs. 5,000, then the government will levy tax. In other words, if the income from agriculture is less than Rs. 5000, then there shall be no levying of taxes. Anything above this amount will be subject to tax as per the applicable income tax slab rates.

Also Read: Do I Need To File Income Tax Returns?

How to calculate agriculture income tax?

The agriculture income tax can be calculated by following the below three steps:

First: Include the Agricultural Income –
Consider A is the agricultural income and  B is the base income of the individual. So, firstly, there will be the calculation of tax (T) on the amount of A+B. Let’s call this tax as T(A+B)

Second: Add the basic tax slab benefit 
Depending upon changes in the Income Tax Rules, the basic income tax slab rate 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 to be calculated on the amount. Let’s call this tax as T(S+A)

Third: Calculate Income Tax liability 
This is the tax that is subject to deductions. Thus IT = T(A+B) – T(S+A)

Also Read: How To Treat Capital Gain From Transfer Of Shares

When is tax applicable on agricultural income?

The following table explains when is tax applicable on agricultural income:

Net Agricultural Income

Net Non-Agricultural Income [Total Income (-) Agricultural Income]

Applicability of tax

Is less than Rs. 5000

Is less than the basic exemption limit

No tax applicable

Is less than Rs. 5,000

Is more than the basic exemption limit

Tax is applicable (ITR-1 form to be used)

Is more than Rs. 5,000

Is less than the basic exemption limit

Tax is applicable (ITR-2 form to be used)

Is more than Rs. 5,000

Is more than the basic exemption limit

Tax is applicable (ITR-2 form to be used)

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