Introduction

Agriculture is the backbone of India’s economy, contributing significantly to employment and GDP. Given its importance, the government provides several tax benefits to farmers and agricultural activities. However, while agricultural income is generally exempt from income tax under Section 10(1) of the Income Tax Act, there are certain conditions and tax implications that individuals and businesses must be aware of.

In this blog, we will explore the taxability of agricultural income in India, covering key aspects such as what qualifies as agricultural income, exemptions, rules for partial taxation, and how it impacts total taxable income. Whether you're a farmer, landowner, or investor in agricultural ventures, understanding these tax provisions can help you plan your finances efficiently and stay compliant with tax regulations. Let's dive in!

What is agricultural Income?

In India, agricultural income is defined under Section 2(1A) of the Income Tax Act, 1961, and is exempt from income tax under Section 10(1) of the Act. However, it may be considered for rate purposes if the taxpayer has other taxable income.

Definition of Agricultural Income (Section 2(1A))

Agricultural income includes the following:

1. Income from Land Cultivation

• Income derived from land situated in India, used for agriculture (e.g., growing crops, fruits, or vegetables).
• The land must be assessed for land revenue or subject to a local rate.

2. Rent or Revenue from Agricultural Land

• Rent received from leasing out agricultural land for agricultural activities.

3. Income from Agricultural Processing

• Income from processing agricultural produce to make it marketable, provided the processing does not alter the original nature of the produce.
• Examples: Drying, cleaning, husking, or milling grains.

4. Income from Farmhouses (Section 2(1A)(c))

• Income from farmhouses situated within agricultural land and used as a residence, storehouse, or operational hub for agricultural activities.

5. Income from Saplings and Seedlings

• Income from growing and selling saplings or seedlings in a nursery is considered agricultural income, even if the nursery is not attached to farmland.

Non-Agricultural Income (Taxable)

Some income appears agricultural but is taxable, such as:

• Income from timber or trees grown spontaneously (not cultivated).
• Dairy farming, poultry farming, fisheries, and animal husbandry.
• Income from agro-based industries (e.g., sugar factories, tea processing units).
• Selling processed farm products beyond basic processing (e.g., making flour, biscuits).

Taxability on Agricultural Income under Old Tax Regime (Partial Integration Method)

Under Section 10(1) of the Income Tax Act, 1961 Agricultural income is exempt from tax. However, if an individual has both agricultural and non-agricultural income, the partial integration method applies if:

1. Non-agricultural income exceeds ₹2,50,000 (₹3,00,000 for senior citizens and ₹5,00,000 for super senior citizens).

2. Agricultural income exceeds ₹5,000.

Partial Integration Method: Agricultural income itself is not taxed, but it is included for determining the tax rate applicable to non-agricultural income. This ensures that individuals in higher income brackets are taxed accordingly.

Steps to Calculate Tax on Agricultural Income

Step 1: Add agricultural income to non-agricultural income and compute tax on the total.

Step 2: Add agricultural income to the basic exemption limit and compute tax on this amount.

Step 3: Subtract the tax from Step 2 from Step 1.

Step 4: Add cess (4%) to get the final tax payable.

Example Calculation

Scenario:

• Agricultural Income = ₹2,00,000

• Non-Agricultural Income = ₹8,00,000

• Old Tax Regime Slab Rates (For FY 2024-25, below 60 years):

• Up to ₹2,50,000 → Nil
• ₹2,50,001 to ₹5,00,000 → 5%
• ₹5,00,001 to ₹10,00,000 → 20%
• Above ₹10,00,000 → 30%

Step-by-Step Calculation

Step 1: Compute Tax on Total Income (Agricultural + Non-Agricultural)

Total income = ₹8,00,000 (non-agricultural) + ₹2,00,000 (agricultural) = ₹10,00,000

Tax on ₹10,00,000:

• ₹2,50,000 – ₹5,00,000 → 5% of ₹2,50,000 = ₹12,500

• ₹5,00,001 – ₹10,00,000 → 20% of ₹5,00,000 = ₹1,00,000

• Total tax = ₹1,12,500

Step 2: Compute Tax on (Exemption Limit + Agricultural Income)

Tax on ₹2,50,000 (exempt) + ₹2,00,000 (agricultural) = ₹4,50,000

• ₹2,50,000 – ₹4,50,000 → 5% of ₹2,00,000 = ₹10,000

Step 3: Calculate Final Taxable Amount

Tax from Step 1 (₹1,12,500) - Tax from Step 2 (₹10,000) = ₹1,02,500

Step 4: Add Cess (4%)

Cess = 4% of ₹1,02,500 = ₹4,100

Final Tax Payable = ₹1,06,600

Key Takeaways

• Agricultural income is not taxed directly but affects tax slabs if other income is taxable.
• It increases the tax slab for non-agricultural income.
• The method ensures agricultural income does not become a tax loophole.

Taxation of Agricultural Income under the New Tax Regime (After Budget 2023)

Under the New Tax Regime (Section 115BAC), agricultural income remains fully tax-exempt under Section 10(1) of the Income Tax Act, 1961. However, there is a major difference from the old tax regime:

Key Differences from the Old Tax Regime

1. No Partial Integration Method:

• In the old tax regime, agricultural income was considered for tax rate determination if total income exceeded ₹2,50,000 and agricultural income exceeded ₹5,000.
• In the new tax regime, agricultural income is completely ignored for tax calculation, making the process simpler.

2. Lower Tax Slabs in the New Regime:

o ₹0 – ₹3,00,000 → 0% (No Tax)

o ₹3,00,001 – ₹7,00,000 → 5%

o ₹7,00,001 – ₹10,00,000 → 10%

o ₹10,00,001 – ₹12,00,000 → 15%

o ₹12,00,001 – ₹15,00,000 → 20%

o ₹15,00,001 and above → 30%

Example Calculation under the New Tax Regime

Let’s take the same scenario as before:

• Agricultural Income = ₹2,00,000

• Non-Agricultural Income = ₹8,00,000

Step 1: Ignore Agricultural Income

Since the new tax regime does not consider agricultural income for tax rate determination, we only calculate tax on the non-agricultural income (₹8,00,000).

Step 2: Apply the New Tax Regime Slabs

• ₹0 – ₹3,00,000 → 0% tax = ₹0

• ₹3,00,001 – ₹7,00,000 → 5% tax on ₹4,00,000 = ₹20,000

• ₹7,00,001 – ₹8,00,000 → 10% tax on ₹1,00,000 = ₹10,000

• Total tax before cess = ₹30,000

Step 3: Add Cess (4%)

• Cess = 4% of ₹30,000 = ₹1,200

Final Tax Payable = ₹31,200

Key Takeaways

• Agricultural income remains tax-free under both tax regimes.
• No Partial Integration Method in the New Regime– Agricultural income does not affect tax rates.
• New Regime is simpler but may not be beneficial if you have exemptions/deductions.
• New Regime may be better for individuals with high agricultural income, as the tax slabs are different.

Conclusion

Agricultural income in India enjoys tax-exempt status under Section 10(1) of the Income Tax Act, 1961, but its impact on overall tax liability varies depending on the chosen tax regime. Under the Old Tax Regime, agricultural income is partially integrated with non-agricultural income for determining tax rates, potentially increasing the overall tax liability for individuals with other sources of income. In contrast, the New Tax Regime (introduced in Budget 2023) offers a simpler approach by completely excluding agricultural income from tax calculations, making it more straightforward for taxpayers.

While both tax regimes ensure that agricultural income remains non-taxable, individuals must carefully evaluate their financial situation before selecting a tax regime. The Old Regime may be more beneficial for those with deductions and exemptions, whereas the New Regime simplifies tax calculations and may be advantageous for individuals with higher agricultural earnings. Understanding these nuances allows taxpayers to make informed decisions and optimize their tax planning strategies.

If you require assistance on filing Income Tax Return, Manthan Experts can be your trusted advisor. Contact them at info@manthanexperts.com.to discuss your specific needs and explore how their expertise can benefit your business.