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What Is Agricultural Income?
In India, income earned, or profit derived from commercial production of agricultural land is known as agricultural income . Other sources of agrarian income include farming land, buildings, and commercial produce from horticulture land.Definition of agricultural income is found under Section 2(1A) of the Indian Income Tax Act of 1961. As per this section, the agriculture income is
- Revenue or rent generated from the land located in India and used for agricultural reasons
- Income earned from this land by agrarian operations like processing of agricultural products for making it market-ready and saleable
- Income assignable to a farmhouse, but only if it satisfies specific conditions laid down in section 2(1A)
- Income derived from seedlings or saplings growing in a nursery
What Are The Examples Of Agricultural Income?
Here is the list of a few examples that are considered as agricultural income .
- Income from the sale of replanted trees
- Revenue from the sale of seeds
- Payment received as rent for agricultural land
- Money received from growing creepers or flowers
- Interest earned by the partner of a firm on capital invested in agricultural operations
- Profits generated by a partner from the company involved in agricultural business operations.
Agricultural Income And Taxation
Under the rules and regulations of the Income-tax act 1961, section 10 (1) , agricultural income is exempted from taxation. The central government does not charge tax on agricultural income derived. However, there is a computation of tax liability in case of the following circumstances:
- Net agricultural income is greater than Rs. 5,000/- for the previous year.
- Total income, apart from net agricultural income, is higher than the basic exemption limit (Note – Base Exemption Limit for taxpayers up to 60 years of age is Rs. 2,50,000 and for taxpayers exceeding 60 years of age is Rs. 3,00,000).
For those who belong to the above income categories, here is how the tax liability will be computed.Step 1: Adding agricultural income and other incomeStep 2: Adding basic exemption limit and agricultural incomeStep 3: Subtracting the resulting amount of Step 1 and Step 2 is the final tax liability.For individuals with agricultural income up to Rs 5,000, it is essential to disclose the revenue in the income tax return form . And, for those with income above Rs 5000, the income disclosure is to be made in ITR 2.
The Benefit Under Section 54(B)
Individual or HUF can claim tax benefit under section 54 (B). This benefit is for tax-paying individuals who sell their agricultural land to buy other agricultural land. There are certain conditions to be met to claim this benefit.
FAQS - FREQUENTLY ASKED QUESTIONS
How much agricultural income is tax free ?
According to the Indian Income Tax Act, if a farmer's income falls below Rs. 5,000 or if their total income minus agricultural income is lower than the basic exemption limit, they will not be liable to pay taxes. The basic exemption limit is Rs. 2.5 lakh for individuals below the age of 60 years and Rs. 3 lakh for those aged 60 years and above.
In simpler terms, if a farmer's income from farming activities is below Rs. 5,000 or if their overall income (including income from sources other than farming) falls below the basic exemption limit, they will not have to pay any taxes on their income. It is important to note that the basic exemption limit varies based on the age of the individual. If an individual is aged 60 years or above, they can earn an additional Rs. 50,000 without having to pay taxes.
This provision is intended to provide relief to small farmers and those with limited income from other sources. It is important for farmers to keep track of their income and ensure that they meet the eligibility criteria for exemption from tax.
Which is not agriculture income ?
Here's a possible rewording of the examples of non-agricultural income:
Revenue generated from poultry farming.
Earnings obtained from beekeeping.
Dividends paid by an organization from its agricultural income.
Income derived from the sale of naturally grown trees.
Profits earned from dairy farming.
Income generated by the production of salt following land inundation by seawater.
Acquisition of standing crops.
Royalty income obtained from mining activities.
Earnings derived from the production of butter and cheese.
Receipts obtained from the shooting of TV serials on a farm property.
How is agricultural tax calculated ?
When calculating tax, it is important to take into account any agricultural income. If the agricultural land is not covered under the relevant tax laws, a separate evaluation must be done for that aspect of the tax. If the agricultural income is below INR 5000, one must file returns through ITR 1. If it exceeds that amount, ITR 2 must be used, which includes a separate column for declaring the agricultural income details.
To calculate the tax due on agricultural income falling under Section 2 (1A) of the IT Act, use the following formula: Total tax due = Net agricultural income + basic exemption limit – (agricultural income + non-agricultural income).
For all other purposes, calculating tax involves the following steps:
Compute tax on the total income (base income + agricultural income). Let's call this T(B+A).
Add the basic tax slab benefit (S) to the agricultural income and calculate another tax on the sum. Let's call this T(S+A).
Deduct any applicable tax deductions from the total tax liability. This is the income tax liability (IT). Thus, IT = T(B+A) – T(S+A).
Remember to aggregate the agricultural income when calculating tax to avoid unnecessary extra taxes or interest on taxes.
Is it mandatory to file ITR for farmers ?
In India, income tax is levied on individuals and organizations based on their income for a financial year. However, there are certain exemptions and deductions available to individuals based on their income level, type of income, and other factors.
In the case of farmers, their income is primarily generated from agricultural activities, and there are certain provisions under the Income Tax Act that provide them with certain benefits. According to these provisions, if the total income generated by a farmer is less than Rs. 5,000, then it is exempted from being taxed. This exemption is provided to help small farmers who may not have a significant income from their farming activities.
Additionally, even if the farmer's total income exceeds Rs. 5,000, they may still be eligible for exemption if their total income minus their agricultural income falls below the basic exemption limit. The basic exemption limit for the financial year 2021-22 is Rs. 2.5 lakh for individuals below 60 years of age and Rs. 3 lakh for individuals aged 60 years and above. This means that if a farmer's total income minus their agricultural income is less than the basic exemption limit, then they will not be liable to pay any income tax.
It's important to note that while these provisions are available to farmers, they still need to file their income tax returns if their total income exceeds the exemption limit or if they have other sources of income apart from agriculture. It's also advisable to consult with a tax expert or accountant to ensure compliance with tax laws and regulations.
Can we claim agriculture loss in ITR ?
In India, agricultural income is exempt from income tax, but taxpayers are required to disclose their agricultural income in their Income Tax Return (ITR) under Schedule EI (except for ITR-1). This is to enable the government to collect data on the extent of agricultural income earned by taxpayers.
If a taxpayer incurs a loss from agricultural activities, they can carry forward this loss for up to eight years and set it off only against future agricultural income. This means that if a taxpayer earns agricultural income in the future, they can reduce their taxable income by the amount of the carried forward loss. However, this carried forward loss cannot be set off against any other income such as salary income, business income, or capital gains.
This provision does not affect the taxpayer's gross total income, which is the sum of all income earned by the taxpayer in a financial year. However, it may reduce the amount of agricultural income that is eligible for partial integration with the taxpayer's other incomeand modify the applicable tax rate on the other income. Therefore, taxpayers need to accurately disclose their agricultural income and losses in their ITR to ensure that they comply with the relevant tax laws and regulations.
Is agricultural income taxable under GST ?
Agriculture is exempt from both direct and indirect taxation in India, according to tax experts. This means that seeds and agricultural produce, as well as services related to their production, are exempt from the Goods and Services Tax (GST) law. This exemption reflects the importance of agriculture to India's economy and its role in ensuring food security. While the government does provide subsidies and support to the agricultural sector, exceptions to the exemption do exist, such as certain processed foods derived from agricultural produce.
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.
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