Earning Agriculture Income and Non Agricultural Income? Know how both will be Taxed

As India is basically an agrarian economy, several incentives and perks are offered, to those making a living through agriculture. In India, agricultural income refers to 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 defined under the Income Tax Act, 1961. According to Income Tax Law, agricultural income generally means:

• Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
• Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.
• Income derived from farm building required for agricultural operations:
• Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

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

The following are some of the examples of non-agricultural income:

• 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.
• Dividend received by shareholder from a company carrying agricultural operations
• Commission earned by broker from selling agricultural produce
• 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.

How is agricultural income taxed?

There is no tax on agricultural income but if an assessee has non-agricultural income as well as agricultural income, such agricultural income is included in his Total Income for the purpose of computation of Income-tax on non-agricultural income.

This is also known as partial integration of agricultural income with non-agricultural income or indirect way of taxing agricultural income. However, income tax aims at taxing the non-agricultural income at higher rates of tax.

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Such partial integration is done only in the case of:

• Individual
• HUF
• AOP/BOI
• Artificial juridical person.

This method is applicable when the following conditions are met:

• Individuals, HUFs, AOPs, BOIs and artificial juridical persons have to compulsorily calculate their taxable income using this method. Thus Company, firm/LLP, co-operative society and local authority are excluded from using this method.
• Net agricultural income is greater than Rs. 5,000 during the year; and
• Non-agricultural income is:
• Greater than Rs. 2,50,000 for individuals below 60 years of age and all other applicable persons
• Greater than Rs. 3,00,000 for individuals between 60 and 80 years of age
• Greater than Rs. 5,00,000 for individuals above 80 years of age

In simple terms, the non-agricultural income should be greater than the maximum amount not chargeable to tax (as per the slab rates)

How to calculate Tax on Non-Agricultural Income if the Assessee has both agricultural & Non-Agricultural Income?

Step 1 – Calculate tax on (non Agricultural Income + net Agricultural Income)

Step 2 – Calculate tax on (net Agricultural Income + max exemption limit as per slab rates)

Step 3 – Calculate final tax (Step 1) – (Step 2) as above and (-) Rebate, if any (+) Surcharge (+) Cess

For instance, Mr X has a Total income of INR 7,50,000 (excluding Agricultural income) and a Net Agricultural income of INR 100,000.

Then as per Step 1, Tax shall be computed on Rs 7,50,000 + Rs 1,00,000 = Rs 8,50,000. Thus, income Tax amount as per this step shall be Rs 82,500 for an individual who is below the age of 60 Years for FY 2020-21.

As per Step 2 we shall add Rs 2,50,000 to Rs 1,00,000 as the applicable Tax slab benefit available to an individual below 60 Years of age is INR 2,50,000. Now we will compute income Tax on INR 3,50,000 (Tax slab benefit 2,50,000 + Net Agricultural income 1,00,000). The amount of Tax shall be INR 5000

As per Step 3, we shall subtract the Tax computed in Second step from the Tax computed in First step = Rs 77,500. Thus, this is the income Tax liability subject to deductions, Education Cess etc as applicable.

If a resident of India has earned agricultural income from a land situated outside India, is it exempt from tax?

No, only agriculture income from land situated in India is exempt from tax.

Any rent or revenue derived from land which is situated in India and is used for agricultural purposes is exempt from tax. Is the assessee required to follow certain conditions to avail such exemption?

The assessee will not be liable to pay tax on the rent or revenue arising from agricultural land subject to the following conditions:

• The land should either be assessed to land revenue in India or be subject to a local rate assessed and collected by officers of the Government.
• In instances where such a land revenue is not assessed or not subject to local rate, the land should not be situated within the jurisdiction of a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board, and which has a population of more than 10,000 (according to the last preceding census); or it should not be situated:
• more than 2kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or

• not being more than 6kms from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
• not being more than 8kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
• The revenue must not include any income arising out of transfer of such land. A direct nexus between the agricultural land and the receipt of income by way of rent or revenue is essential.
• Both rent or revenue from the agricultural land and income earned by the cultivator or receiver by way of sale of produce are exempt from tax only if agricultural operations are performed on the land.

What if agriculture operation is carried on urban land?

If agricultural operations are carried out on land, either urban or rural, the income derived from sale of such agricultural produce shall be treated as agricultural income and will be exempt from tax.

How is Capital gain on transfer of land used for agricultural purposes charged?

Section 54B gives relief to a taxpayer who sells his agricultural land and acquires another agricultural land from the sale proceeds. Conditions to be satisfied to claim the benefit of this Section:

• The assessee must be an individual or a HUF.
• The agricultural land should have been used for agricultural purposes. It may be a long term asset or a short term asset.
• It must have been used either by the assessee or his parents for agricultural purposes in atleast 2 years immediately preceeding the date on which the transfer of land took place.
• The assessee should have purchased another land, which is being used for agricultural purposes, within 2 years from the date of sale.
• In case of compulsory acquisition, the period of acquisition of new agricultural land will be determined from the date of receipt of compensation. However, as per Section 10 (37), no capital gain would be chargeable to tax in case of an individual or HUF if agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and received on or after 01-04-2004.

• The whole amount of capital gain must be utilised in the purchase of the new agricultural land. If not, the difference between the amount of capital gain and the new asset will be chargeable as capital gains and the tax will be computed accordingly.
• The new asset purchased should not be sold within 3 years from the date of acquisition.
• If sold, the cost of the new asset will be reduced by the amount of capital gain (claimed as exemption under Section 54B) for the purpose of computing tax on capital gains.
• Where the amount of capital gain is not utilised by the assessee for the purchase of the new asset before the due date of furnishing his return of income, he may deposit it in the Capital Gains Account Scheme (CGAS) of any specified bank.
• In such a case, the cost of the new asset shall be deemed to be the amount already utilised by the assessee for the purchase of the new asset together with the amount deposited in the CGAS.
• If the deposited amount is not utilised for the purchase of the new asset within the specified period, then the unutilised amount shall be taxed as income in the year in which the period of 2 years from the date of sale of the original asset expires.

Taxation of partly agricultural income

There are some businesses which include some activities as Agricultural and some as non- agricultural. However the problem arises in taxation as to how much portion is to be treated as Agriculture and how much as non-agriculture. Hence Income-tax Act, 1961 has given some percentage where some part is treated as agricultural business while rest shall be non-agricultural income. These businesses include manufacturing of tea, coffee or rubber in India.

Particulars	Agricultural (Exempt) portion	Non-agricultural (Taxable) portion
Growing & Manufacturing of tea	60%	40%
Growing & Manufacturing of rubber	65%	35%
Growing & Manufacturing of coffee	75%	25%
Growing & Manufacturing of coffee grown, cured, roasted and grounded	60%	40%

Despite agricultural income being tax-exempt, assessees have to be cautious while dealing with such income. They must make sure that they aggregate agricultural income with their total income to avoid interest payments and possible penalties for concealment of income.

Assessees must also maintain credible records to provide the tax authorities with proof of ownership of agricultural land and evidence of having earned agricultural income.

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