Introduction

In India, agricultural income refers to income earned or revenue derived from sources that include
farming land, buildings on or identified with an agricultural land and commercial produce from a
horticultural land.

Agricultural income is generally classified as a valid source of income. It comprises income from
agricultural land and commercial products produced from it, buildings on or related to any agricultural
land.

According to section 2(1A) of Income Tax Act of 1961, agricultural income is defined as:

a) Any rent or revenue generated from land in India and is used for agricultural purpose.

b) It includes the income generated from agricultural operations including processing of

agriculture produce for sale in the market.

c) Income earned from farmhouse which may be used as storehouse or dwelling unit.

d) Any income which is earned by selling saplings or seeds grown in the nursery.

e) Share - profits received from your partner who is engaged in agricultural activities.

f) Income received from a building situated near the agricultural land will be treated as an
agricultural income if the below-mentioned conditions are satisfied:

 The building must be occupied by the cultivator.

 The building is used as dwelling house or storehouse.

 The land is either assessed to land revenue in India or it is subject to a local rate
assessed.

However, agricultural income does not include the following:

 Income generated by selling processed produce of agricultural nature

 Income from extremely processed produce

 Income from trees sold as timber

Examples of Agricultural Income

The following are some of the examples of agricultural income:

 Income derived from sale of replanted trees.

 Income from sale of seeds.

 Rent received for agricultural land.

 Income from growing flowers and creepers.

 Profits received from a partner from a firm engaged in agricultural produce or activities.
  Interest on capital that a partner from a firm, engaged in agricultural operations,
receives.

Examples of Non-Agricultural Income

All revenue generated from land may not fall under Agricultural income. Some incomes generated from such
activities and are not considered as agricultural income in India are as follows:

 Income from poultry farming.

 Income from bee hiving.

 Any dividend that an organization pays from its agriculture income.

 Income from the sale of spontaneously grown trees.

 Income from dairy farming.

 Income from salt produced after the land has flooded with sea water.

 Purchase of standing crop.

 Royalty income from mines.

 Income from butter and cheese making.

 Receipts from TV serial shooting in farm house.

Composition of Agricultural Income

Agricultural income is defined u/s 2(1A) and exempted under u/s 10(1) of Income Tax Act

A revenue generated from the following three heads comes under Agricultural Income:

1. Any rent or income generated from land situated in India and used for agricultural activities: An
individual is not liable to pay tax on the rent or revenue generated if it fulfils the following conditions
–

 If the land is either assessed to land revenue in India or is subject to a local rate assessed
and collected by government officers.

 If the land is situated within the jurisdiction of municipality and cantonment board with
a population of more than 10 thousand as per the latest census in which the sale of land took
place.

Moreover, the land should not be situated at any of the following locations:

 The land should not be situated not more than 2km away from the local limits of
any cantonment board or municipality and the density should be more than 10,000 but
not more than one Lakh.

 The area should be within six km from the local limits of any municipality and
cantonment board with a population more than 1, 00,000 but less than 10, 00,000.
  The area which is not more than 8 Km. from the local limits of any municipality
and cantonment board, with a population above 10, 00,000.

 The income generated by transferring agricultural land (said above) does not come
under agricultural income.

2. Any revenue generated from agricultural operations from these land (said above): It includes
processing of agricultural produce, rent received via cash or kind so that it can render in the market
or sell the produce.

3. Any income generated from building own/occupied by the assessee: It includes the rent
generated from the land that carries out agricultural operations. It must be in the immediate vicinity
of the land.

Further, to consider the income generated as an agricultural income, you should keep in mind the
following key points:

 There must be an existence of land: For treating land as an agricultural income, firstly
there must be an existence or presence of land.

 The land should be used for agricultural purposes: The land must be used only for
agricultural purposes. The main purpose of the land includes cultivating crops, rent, and revenue
generated by selling the produce.

 It is necessary to use the land for cultivation: The land should be used for agricultural
operations. For instance – land producing grain, tea, coffee, fruits, commercial crops, groves,
grasslands, plantations, spices, etc.

 Ownership in not necessary: it is not compulsory that the cultivator is always the owner
of the land, he could be tenant or subtenant. In the case of rent or revenue, it is essential that
assessee should have an interest in the land as an owner or mortgagee.

Is Agricultural Income Taxable?

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The
central government cannot levy tax on the agricultural income received. However, agricultural income is
considered for rate purposes while assessing the income tax liability if the following two conditions are
met:

 Net agricultural income is greater than Rs. 5,000/- for previous year.

 Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs.
2,50,000 for individuals below 60 years of age and Rs. 3,00,000 for individuals above 60 years of
age).

If these two conditions are met, tax liability shall be computed in the following manner:

 Step 1: Let us regard agricultural income as X and other income as Y Tax computed on
X+Y is B1
  Step 2: Let us regard basic exemption slab for income tax payment as A Tax computed on
A+X is B2

 Step 3: The actual income tax liability shall be B1-B2

Note: If the individual’s aggregate agricultural income is up to Rs. 5,000, the individual will have to
disclose the agricultural income in the income tax return (ITR). In case the agricultural income crosses Rs.
5,000, the individual will have to disclose the agricultural income in ITR 2.

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 or 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.

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

 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)

 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)

 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.

Section 54B of the Income Tax Act, 1961

Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their agricultural land and
use the sale proceeds to acquire another agricultural land. To claim tax benefit under Section 54B of the
Income Tax Act, the following conditions will have to be satisfied:

 This benefit can only be claimed by an individual or a HUF

 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.

 The taxpayer should purchase another agricultural land within two years from the date
of selling the old land. In case it is an incident of compulsory acquisition, the period of acquiring
new agricultural land will be assessed from the date of receipt of compensation. It must be
 noted that under Section 10(37), capital gain shall not be chargeable to tax if agricultural land is
compulsorily acquired under any law, and the consideration of which is approved by the central
government or banking regulator and received on or after 01-04-2004.

Conclusion
Agricultural income is the income earned from land which is used for agricultural purpose. As per section
10(1), agricultural income is exempted from tax. But all incomes from agriculture are not exempted from
tax.

Some key points of agricultural income that an individual need to keep in mind are as follows:

 The revenue generated should be from land.

 The revenue should be used for agricultural operations on the land.

 The revenue should be from the cultivation of the land.

 It is not necessary that the existing land is under the ownership of assessee.