Understanding the taxation of agricultural income

Taxation of agricultural income in India is governed by specific provisions under the Income Tax Act. Agricultural income enjoys a special status and is generally exempt from income tax. In this detailed explanation, we will discuss the taxation of agricultural income in India, including its exemptions, clubbing provisions, reporting requirements, and relevant considerations.

1. Definition of Agricultural Income:

The Income Tax Act does not specifically define agricultural income. However, it includes income derived from activities related to agriculture, such as cultivation of land, the process of raising agricultural produce, and the use of land for agricultural purposes. Income generated from dairy farming, poultry farming, beekeeping, and other allied agricultural activities may also be considered as agricultural income.

2. Scope of Agricultural Income:

Agricultural income includes various types of income generated from agricultural activities. It encompasses income from the following sources:

• Cultivation of Crops: The primary and most straightforward source of agricultural income is the cultivation of crops. Income generated from growing and selling crops, whether food grains, fruits, vegetables, or cash crops, falls within the scope of agricultural income.
• Livestock and Dairy Farming: Revenue generated from activities related to livestock, such as the sale of milk, wool, or other products, is considered agricultural income. Income from dairy farming and animal husbandry is integral to the scope of agricultural income.
• Poultry Farming: Income derived from poultry farming, including the sale of eggs and poultry products, is treated as agricultural income.
• Forestry and Plantation: Revenue generated from the cultivation and sale of timber, wood, or other forest produce is considered agricultural income. Plantations of tea, coffee, and rubber also fall within the scope.
• Agro-Processing and Allied Activities: Income derived from processing and allied activities directly related to agriculture, such as milling, pressing, or other processing of agricultural produce, is included in the scope of agricultural income.
• Agritourism: In recent times, income generated from agritourism, where agricultural land is used for recreational and tourism purposes, may be considered agricultural income.
• Rent from Agricultural Land: Rent received from leasing agricultural land is part of agricultural income. The tenant, in this case, may also be eligible for exemptions on the income derived from such land.

3. Exemption of Agricultural Income:

Agricultural income is exempt from income tax under the Income Tax Act in India. This exemption is provided under Section 10(1) of the Act. According to this provision, any income derived from agricultural operations carried out on land situated in India is not considered as taxable income. This exemption applies to individuals, Hindu Undivided Families (HUFs), LLP/Firm, Companies and other entities that generate agricultural income.

The rationale behind exempting agricultural income is to promote and support the agricultural sector, which plays a crucial role in the Indian economy. By exempting agricultural income from taxation, the government aims to incentivize agricultural activities and provide relief to farmers and individuals engaged in agricultural operations.

4. Income Tax on Agricultural Income:

Though agricultural income is exempt u/s 10(1), the Income-tax Act has laid down a method to indirectly tax such income. This method or concept may be called as partial integration of agricultural income with non-agricultural income.  The purpose behind this method is to tax non-agricultural income at higher rates of tax.

This method applies only to individuals, HUF, AOPs, BOIs and artificial juridical persons, when the following conditions are satisfied:

• The net agricultural income is greater than ₹5,000 during the year
• Non-agricultural income is above the basic exemption limit.

1. More than ₹2,50,000 for individuals below 60 years of age and all other applicable persons.
2. More than ₹3,00,000 for resident senior citizens in the age brackets of 60 to 79 years of age.
3. More than ₹5,00,000 for resident super senior citizens of the age of 80 years or more.

Companies, LLP/firms, cooperative societies, and local authorities are excluded from this. Their entire agricultural income is exempt from tax.

Calculation of tax as per partial integration method

Step 1: Calculate income tax on the aggregate of Net Agricultural Income and the non-agricultural income.

Step 2: Calculate income tax on the aggregate of Net Agricultural Income and the basic exemption limit as per the slab rates.

Step 3: The amount of income tax determined in Step 1 will be reduced by the amount of income tax determined in Step 2.

The amount so calculated is the income tax payable by the assessee.

5. Income Tax on Non-Agricultural Income:

It is important to note that the exemption applies only to income derived from agricultural activities. Income from non-agricultural sources, such as the sale of farm machinery, rent from non-agricultural properties, and income from trading in agricultural commodities, does not qualify for the exemption. If an individual engages in non-agricultural activities on agricultural land, such as renting it out for commercial purposes, income generated from these activities is not considered agricultural income and is taxable as per the provisions applicable to that specific income

It is also worth noting that while agriculture income is exempt from income tax, it is still taken into account for the purposes of determining the tax rate applicable to a person’s non-agricultural income. In other words, a person’s overall income tax liability is calculated based on their total income, including any exempt agriculture income.

6. Clubbing of Agricultural Income:

The exemption for agricultural income is applicable to the individual who generates the income. It cannot be clubbed with the income of any other individual, including family members. Each individual's agricultural income is considered separately for the purpose of exemption.

It's worth noting that if agricultural income is transferred by an individual to a spouse, minor child, or any other person, it may be subject to the clubbing provisions under Section 64 of the Income Tax Act. In such cases, the transferred income is treated as the income of the transferor and is taxable in their hands.

7. Reporting of Agricultural Income in ITR:

If you have only agriculture income and your total income is below the minimum taxable limit, then you are not required to file an Income Tax Return (ITR) in India. However, if your total income exceeds the minimum taxable limit (which is currently INR 2.5 lakh for individuals below 60 years of age), then you are required to file an ITR, even if your income consists solely of agriculture income.

While agricultural income is exempt from income tax, it is still required to be reported in the Income Tax Return (ITR). Reporting agricultural income accurately helps in maintaining proper records and complying with the provisions of the Income Tax Act. Here's how agricultural income is reported in the ITR:

• Selecting the Appropriate ITR Form: The selection of the ITR form depends on the nature and amount of income, including agricultural income. Generally, individuals and HUFs with agricultural income report it in ITR-1 (Sahaj) or ITR-2, depending on their other income sources and eligibility.
• Disclosing Agricultural Income: In the relevant section of the ITR form, individuals need to disclose the amount of agricultural income earned during the financial year. In ITR-1, agricultural income is reported under the head "Exempt Income" in Schedule EI. In ITR-2, it is reported under the head "Income from Other Sources" in Schedule OS.
• Details of Agricultural Land: In the ITR form, individuals may be required to provide additional details about the agricultural land they own. This may include the location, area, type of land (irrigated or non-irrigated), and its usage for agricultural activities.
• Supporting Documents for Agricultural Income: While filing the ITR, individuals are generally not required to attach supporting documents for agricultural income. However, it is advisable to maintain proper records and supporting documents related to agricultural income, such as land ownership documents, rent receipts, and other relevant documents. These documents can be helpful in case of any future assessment or verification by the tax authorities.

8. Agricultural Income and Other Provisions:

Certain provisions of the Income Tax Act take into account agricultural income for computation purposes. These provisions include:

• Basic Exemption Limit: The basic exemption limit for income tax is determined based on the non-agricultural income. Agricultural income does not affect the basic exemption limit for non-agricultural income.
• Set-Off and Carry Forward of Losses: Losses incurred in agricultural activities cannot be set off against non-agricultural income. However, agricultural losses can be carried forward for eight years and set off against future agricultural income.

9. Agricultural Income and Tax Audit:

Agricultural income does not generally impact the applicability of tax audit provisions under the Income Tax Act. However, if an individual has non-agricultural income and meets the specified turnover threshold, a tax audit may be required for the non-agricultural income as per the provisions of the Act.

10. Assessments and Scrutiny:

While agricultural income is exempt from income tax, tax authorities may scrutinize the agricultural income reported in the ITR to ensure its genuineness. In case of any discrepancies or doubts, tax authorities may request additional information, documents, or conduct assessments to verify the agricultural income

11. Impact of Aggregation of Income:

When determining tax liability for individuals or Hindu Undivided Families (HUFs), agricultural income is not aggregated with non-agricultural income. However, if an individual or HUF has income from other sources, such as business or profession, which is clubbed with agricultural income, the overall tax liability will be calculated considering the aggregate income.

12. State-specific Taxation on Agricultural Income:

It's important to note that the taxation of agricultural income is primarily governed by the central government. However, certain states in India have the authority to levy taxes on agricultural income within their jurisdictions. As of now, no state has implemented any tax on agricultural income.

13. Tax Planning Considerations:

While agricultural income is exempt from income tax, individuals may need to consider tax planning strategies to optimize their overall tax position. This may include prudent planning of non-agricultural income, utilizing deductions and exemptions effectively, and managing investments in a tax-efficient manner.

Conclusion:

In India, agricultural income enjoys a special exemption from income tax. It is crucial to understand the provisions related to agricultural income and comply with reporting requirements in the ITR. Even though agricultural income is exempt, individuals should accurately report it in the ITR form and maintain proper documentation for verification purposes. It is advisable to consult with a tax professional or refer to the specific tax laws applicable in your jurisdiction for personalized advice and accurate reporting of agricultural income in your tax return.