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Traditionally, India has been an agrarian nation. The First Five Year Plan after independence had agriculture as its central focus sector, highlighting the value of the agricultural industry to the Indian economy. Most of the population involved in agriculture either practice subsistence farming or are small farmers. As a result, the Indian Income Tax Act under Section 10(1) has made earnings from agriculture tax-free.
Agricultural Income Is Defined By The Income Tax Act In Three Distinct Points:
- When a person generates revenue by leasing or renting via an agricultural land located in India
- When a person generates revenue by the sale of commodities from an agricultural area
- When a person receives income by building a farm for agricultural effect
Here Are Some Things That Might Help To Determine Which Revenue Is A Valid Agricultural Revenue:
- Revenue should be generated from agrarian means
- It should always be from an existent piece of land
- Income gained from commodities sold from agrarian land
How Is Agricultural Income Taxed?
There is no clause for directly taxing agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is not considered a means of income. Income generated from agriculture is exempted from taxation by the Central Government. However, there is an indirect method of taxing that is levied on agricultural income.While the Central Government cannot directly tax the income, the State Government is well within its right to levy a tax on agricultural income. The latest amendment mentions that the State Government can levy tax above the exempted rate, which is Rs 5,000 in a fiscal year.According to the Finance Act, the total tax would be a combination of non-agricultural income and agricultural revenue. The Income Tax Act taxes the non-agricultural income at a higher rate. Individuals, BOIs, etc. have to calculate their taxes using this method. However, companies, LLPs, etc. are excluded.
Calculating Tax On Agricultural Revenue
- Take the sum of the agricultural income and non-agricultural income. The tax (A) should be computed on this amount.
- The base tax slab changes as per the changing Income Tax guidelines. Add the base tax slab to the agricultural income. Another Tax (B) needs to be computed on this sum.
- Deduct (B) from (A). That will be the Agricultural Income Tax liability. Agriculture Tax = (A) – (B)
- Any available rebate, applicable surcharge and education cess are added too to the final taxable amount.
Exceptions to the calculation
In the case of agricultural land not meeting the criteria of the section, the person needs to conduct a separate tax evaluation. Also, if the revenue is below Rs 5,000, then ITR1 has to be filed.
FAQS - FREQUENTLY ASKED QUESTIONS
Are farmers exempt from paying income tax ?
Currently, the government of India has provided income tax exemption to farmers, which means that they are not required to pay any income tax to the government. This exemption has been given to recognize the importance of agriculture as a major source of livelihood and income for a significant portion of the population in India.
It is worth noting that the income tax exemption applies only to income generated from agricultural activities. In case a farmer earns income from non-agricultural sources such as rental income, capital gains, or other businesses, then they would be required to pay income tax on such income.
This policy aims to support the agricultural sector and ensure that farmers have a certain level of financial security, especially considering the various challenges and uncertainties that they face in terms of weather conditions, market prices, and other factors that affect agricultural productivity. By exempting farmers from income tax, the government hopes to encourage more people to take up farming and help improve the overall growth and development of the agricultural sector in the country.
Is agricultural income completely tax-exempt ?
Section 10(1) of the Income Tax Act, of 1961 provides that any income earned from agricultural activities is exempted from taxation by the Government. However, to determine the tax rate, agriculture income may be taken into consideration if the net agriculture income is more than Rs.5,000 from the previous year, and the total income minus the agricultural income is higher than the basic exemption limit. The basic exemption limit is Rs.2.5 lakh for individuals below 60 years of age, and Rs.3 lakh for those who are 60 years or older.
Will income from raising animals to be categorised as agricultural income ?
Animal husbandry income is not classified as agricultural income. This means that the revenue earned from rearing or raising animals, such as cows, chickens, or pigs, is not considered agricultural income under most tax and accounting systems.
Agricultural income is defined as income earned from the cultivation of land, such as the production of crops or the growing of trees. While animal husbandry involves the use of land, it is not considered to be cultivated in the traditional sense. This distinction is important because agricultural income is often subject to different tax treatments, exemptions, and benefits compared to animal husbandry income.
I make a living by growing tea; is this considered agricultural income ?
Tea growers are subject to taxation on 40% of their income as business income, while the remaining 60% is exempt from taxation as agricultural income.
The taxation of tea growers' income is based on the nature of their income sources. As such, tea growers need to keep accurate records of their income and expenses to ensure that they comply with tax regulations and avoid any penalties or legal issues.
What does India not classify as agricultural income ?
If you generate income through various means such as poultry farming, selling naturally growing trees and fruits, beekeeping, dairy products including milk, butter, and cheese, renting out your farmhouse for filming TV series, earning royalties from mining activities, salt production after the land has been flooded by the sea and acquisition of standing crops it will not be classified as agricultural income.
What if farming is done on a piece of urban land ?
Agricultural income earned through operations conducted on either rural or urban land is exempt from taxes. This means that individuals or entities engaged in farming or agricultural activities are not required to pay taxes on the income they earn from these operations. However, it is important to note that this tax exemption applies specifically to income generated through agricultural operations and not to income from other sources. Additionally, there may be certain conditions and regulations that need to be met to qualify for this exemption, which can vary depending on the country or region.
In ITR 1, how should agricultural revenue be reported ?
Agricultural income must be reported in the Agriculture Income column while filing tax returns using ITR 1. However, ITR 1 can only be used if the agricultural income earned during the year is up to Rs. 5,000. If the income exceeds this limit, individuals must file their tax returns using form ITR-2 and report agricultural income in a different section of the form. Accurate reporting of all sources of income is crucial to avoid penalties or legal issues in the future. It is advisable to seek guidance from tax professionals or the income tax department to avoid any confusion or uncertainty.
What is partly agricultural income ?
Partial agricultural income refers to the income earned by an individual entity engaged in agricultural activities and uses agricultural produce as raw materials in the manufacturing of finished products. In such a case, the income earned from the sale of finished products is divided between agricultural and non-agricultural income.
For instance, a farmer who grows cotton and converts it into yarn or cloth for selling will be earning partial agricultural income. In this case, the farmer will earn agricultural income from the sale of cotton and non-agricultural income from the sale of yarn or cloth.
I live in India and earn money from farming on property in Nepal. Is this free of tax ?
No, income generated from agricultural activities on land in India will be exempt from taxation.
How much of India's agricultural income is exempt from taxes ?
If a farmer earns less than Rs. 5,000 or if their total income, after deducting agricultural income, is less than the basic exemption limit of Rs. 2.5 lakh (for individuals under the age of 60) or Rs. 3 lakhs (for individuals aged 60 and above), then their income will not be subject to tax. This means that farmers who earn less than Rs. 5,000 or whose total income is below the basic exemption limit, will not have to pay any income tax on their earnings. It is important to note that agricultural income is treated differently from other forms of income in India and is subject to different tax rules.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
