Income tax on Agriculture Income, a dilemma to be solved today. The meaning of Agriculture activity is not given in Income Tax Act,1961. However, the Respected Supreme Court of India defined the agricultural activity as the combination of basic operations and subsequent operations.
Basic Operations-
Application of human labour skill on land to make crop ready at the land, for example, ploughing, sowing seeds, planting or similar activities.
Subsequent Operations-
Activities carried out after the crop is ready to harvest for example weeding, digging, spraying pesticides or similar activities.
As per section 2(1A), few incomes are considered as agricultural income
- Rent received from letting out of land situated in INDIA for being used for agricultural purpose.
- Income earned from selling crops grown by performing agricultural activities (Basic Operations + Subsequent Operations).
- If a building is within the agricultural field or in the vicinity and it is used for storing of supplies or as a dwelling unit known as a farm building. Income arising from farm building situated in the Rural area is treated as agricultural income. (if situated in urban area income is treated under the head house property)
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Income Tax on Agriculture Income earned in India
As per Section 10 of Income Tax, 1961 any type of Agricultural Income is Exempted in the hands of an assessee. No tax is charged on Agricultural Income but it is considered while calculating Total Tax Liability. If an assessee fulfils these two conditions then such Income is considered for the calculations of Income Tax-
- Total Agricultural Income exceeds Rs. 5,000.
- Total of Income other than Agricultural Income (Non-Agricultural Income) exceed the basic exemption limit. (2.5lakhs /3lakhs /5lakhs)
After the above conditions are satisfied Partial Integration Method is applied for the calculation of Income Tax liability. This method is used for the Individuals, HUF, AOP, BOI or any other assessee having exemption limit. For Corporate, LLP or Partnership (no exemption limit) partial integration method is not applicable.
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Partial Integration method
When a person has both agricultural income as well as non-agricultural income, the following partial integration method is applicable-
| Step 1 | Calculate Income Tax Liability for total of Non-Agricultural and Agricultural Income without cess |
| Step 2 | Calculate Tax Liability for total of Exemption Limit and Agricultural Income without cess. |
| Step 3 | Compute the Income Tax difference between STEP 2 and STEP 1 and add Cess. |
In other words, Income Tax liability on agriculture Income can be calculated on the basis of the following formula-
Agricultural Income = X
Non-Agricultural Income = Y
Basic Exemption (Suppose) = 2,50,000
| Step 1 | Tax on (X+Y) = A |
| Step 2 | Tax on (X+2,50,000) = B |
| Step 3 | Actual Tax = (A-B) + Cess |
Lets take an example-
Non-Agricultural Income= 5,00,000
Agricultural Income= 6,00,000
Lets Calculate Income Tax liability for
1) an individual aged 54
2) ABC Ltd.
1) Calculation of Income Tax liability for Individual
| Step 1 | Income Tax before cess on (6,00,000 + 5,00,000) = 1,42,500 |
| Step 2 | Income Tax before cess on (6,00,000 + 2,50,000) = 82,500 |
| Step 3 | Actual Tax before cess (Step 1- Step 2)= 60,000 |
Income Tax liability = 60,000+ cess @ 4%= 62,400
2) Calculation of Income Tax liability for ABC Ltd
No partial Integration is allowed for corporates therefore,
Tax Liability= (5,00,000 X 30%) + 4% Cess= Rs 1,56,000
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Treatment of Composite Income
Composite Income means where an assessee is carrying both growing and manufacturing activities. In these cases, income from growing crops is treated as agricultural income and income from manufacturing activities is treated as business income.
Manner of computation of agricultural and business income
| Agricultural Income | |
| Market Value of agricultural Produce | XXXX |
| Less: Cultivation expenses | (XXXX) |
| Agricultural Income | XXXX |
| Business Income | |
| Income From the sale of the final product | XXXX |
| Less: Market Value of agricultural Produce (cost of raw materials) | (XXXX) |
| Business Income | XXXX |
For Example: An Individual assessee grows tomato after incurring Rs 5 lakhs expenditure and market value is 8 lakhs. However, he manufactures ketchup by incurring expenses of 6 lakhs and sold the whole supply at Rs 25 lakhs.
Agricultural Income= 8lakhs – 5lakhs= 3lakhs
Business Income= (25lakhs – 6 lakhs) – 8lakhs = 11 lakhs
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In some cases, portions of agricultural and business income are predefined by the lawmakers under Income tax rules. If the assessee is engaged in the following activities then Single income is calculated and distributed in given proportions-
| Type of business | Agricultural Income | Business Income |
|---|---|---|
| Growing and Manufacturing of Rubber | 65% | 35% |
| Growing and Curing of Coffee | 75% | 25% |
| Growing, curing, roasting and grinding of coffee | 60% | 40% |
| Growing and manufacturing of TEA | 60% | 40% |
Example-
Total income computed from growing and manufacturing of tea is 20 lakhs. As per income tax rules-
8 lakhs will be treated as business income (40%), and
12 lakhs as agricultural income (60%)
Read Also: Books of Accounts -Section 44AA of Income Tax Act, 1961
Income Tax on Agriculture Income earned outside India
No exemption is available for such income.
- It is taxable for Ordinary Resident
- For Non-Ordinary Resident and Non-Resident it is taxable, if received in India
Important Points
- If the partnership is engaged in agricultural operations and income is treated as agricultural income, interest on capital given to partners is also treated as Agricultural Income.
- Income arising from the sale of agricultural land is not treated as agricultural income.
- Income from dairy farming, poultry farming is also not agricultural income.
- Earned income by selling Saplings or seedlings by a nursery irrespective of basic operations is agricultural income.
The author of the above article is Aditya Kishore.
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