Agricultural Income

As per Income Tax Act income earned from any of the under given three sources meant
Agricultural Income. Agriculture income is exempt under the Indian Income Tax Act. This means
that income earned from agricultural operations is not taxed. The reason for exemption of
agriculture income from Central Taxation is that the Constitution gives exclusive power to make
laws with respect to taxes on agricultural income to the State Legislature. However while
computing tax on non-agricultural income agricultural income is also taken into consideration.
Hence Agricultural income [2(1A)] has not been taxed right from the beginning under the
Income-tax Act. The justification for such exemption is that income from agriculture is taxed in
the form of land revenue. Another reason for its being kept outside the purview of the Incometax Act, 1961, is that agriculture being a State subject, the Central Government is not entitled to
tax this source of income. The State Governments are of course, free to tax this source. A few of
them are, in fact, doing so. The position under the Income-tax Act is that section 10(1) exempts
agricultural income from income-tax. Because of the exemption it enjoys, it is necessary to
clearly understand the definition of the term Agricultural Income. In the exact sense,
Agricultural Income as defined u/s 2(1A) includes the various types of incomes
More ever Agricultural Income is exempt from tax if it comes within the definition of
agricultural income as given in Section 2(1A).

Definition Sec .2(1A)

By virtue of this section 2(1A), agricultural income means

i. Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes.
ii. Any income derived from such land by agricultural operations including processing of the
agricultural produce, raised or received as rent-in-kind so as to render it fit for the market, or sale
of such produce; and
iii. Any income derived from any building, farmhouse or land utilized in connection with
cultivation of agricultural produce provided that-

a) The land concerned is either assessed to land revenue or local rates and is not situated
within 8 km of such municipal limits, and
b) The building or land concerned is situated in the immediate vicinity of the agricultural land
and is utilized as a dwelling house, store house or as other out building.

HIGHLIGHTS OF THE PROVISIONS OF INCOME WHICH IS PARTIALLY

AGRICULTURAL INCOME AND PARTLY FROM BUSINESS

Business Income

Agricultural Income

Growing and Manufacturing Tea[Rule 8]

40%

60%

Growing and Selling of Rubber[Rule 7A]

35%

65%

Sale of Coffee grown and cured by the Seller

[Rule 7B(1)]

25%

75%

Sale of Coffee grown, cured, roasted and

grounded by the seller with or without mixing
chicory [Rule 7B(2)]

40%

60%

For other Composite Business [Rule 7]

In computing Business Market Value of

Income the Market
Agricultural Products.
Value of the
agricultural produce is
to be deducted.

Nature Of Business

In India, power to tax agricultural income lies with the state governments. For a variety of
reasons the state governments have been reluctant to introduce a full-fledged agricultural income
tax, thus introducing a basic inequality in the operation of the tax system.
Several arguments have been advanced against introducing agricultural income tax and the most
prominent among them is that such a tax will be difficult to implement since farmers do not

maintain standard accounts of their costs and returns. In actual fact a major reason inhibiting the
state governments is their fear of antagonizing the farm lobby.+
It is argued that the farm sector suffers from adverse terms of trade and this is also cited as a
reason for not taxing the farm sector. The absence of this tax results in inequity in the income tax
structure as a whole. Within the agriculture sector the non-introduction of this tax favors the rich
agriculturists against the poor.

The growth of food production since independence has only been just sufficient to meet the
needs of a growing population and in this context it may not be wise to impose a heavy tax
burden on the sector, which may affect food production adversely. It is also possible that revenue
realization from an agricultural income tax may be inelastic, considering the lower rate of growth
of this sector compared to other sectors. With the rapid rate of growth of population and the
consequent fragmentation of land holdings the economic surplus that originates in this sector is
not likely to expand fast, resulting in low buoyancy of the agricultural income tax. But indirect
resource mobilization of this sector is possible in a variety of ways provided the political will
exists.
Several inputs such as water, electricity, and fertilizers are provided to the farmers at highly
subsidized rates. The subsidy on these accounts largely accrues to the big farmers as compared to
the small and marginal ones. Given this it may be more feasible to mobilize resources from the
farmers through a gradual reduction in subsidies rather than by introducing a full fledged
agricultural income tax.

India may have to wait several more years before it is able to integrate taxation of agricultural
income with general income tax. Meanwhile it would not be prudent to exclude the farm sector
from the process of overall resource mobilization.

Kind of Agricultural Income:

According to the definition given u/s 2(1A), agricultural income can be classified into the
following five kinds:

Rent or revenue derived from land.

Income derived from land by agriculture.

Income by the performance of any process to render the produce fit to be marketed.

Income by the sale of the produce raised or received by him as rent.

Income from building owned and occupied by the cultivator or the receiver of rent-inkind.
Provided it is in the immediate vicinity of the land and is used as a dwelling house or a store
house or an out-building in connection with it. The land on which the building is situated must
also fulfill the conditions already mentioned.
Any income received by the person by the sale of produce raised or received as rent-in-kind
Any income derived by any person by the sale of agricultural produce raised by him or received
as rent-in-kind shall also be agricultural income. Sometimes such person puts some extra effort
by selling the produce through his own shop, any extra profit raised due to shopping activities
shall not he agricultural income.
Income from buildings used for agriculture
Any income derived from a building used for agricultural operations shall be agricultural
income provided
(a) The building from where the income is received, is in the immediate vicinity of the land and
is occupied by the owner, or by the cultivator or by the receiver of rent-in-kind.
(b) Building is used as a dwelling house or a store house or other out-building.
The cultivator or the receiver of the rent-in-kind, by reason of his connection with the land, is in
need of the house as a dwelling house or as a house to store the goods required for agricultural
operations.
(c) The land if assessed to land revenue in India or is subject to a local rate assessed and
collected by officers of the Govt. and in case the land is not assessed to land revenue or to local
rate, it should not be situated within the urban areas.

Following are the Agricultural Incomes:

Income from land leased out as grazing land for cattle required for agricultural purposes. CIT v
Rai Shamsherjung Bahadur [1953] 24 ITR 1 (A11).
1.

Income derived from running of a dairy, which is quite incidental to agriculture and planting
bushes in replacement of bushes that have died or become permanently useless. CIT v Kokine
Dairy, Ranggon [1938] 6 ITR 502.

2.

Income from the sale of dried tobacco leaves has been held to be agricultural income since
tobacco leaves are ordinarily dried to make them fit for sale. CIT v Katragadda Madhusudhana
Row [1944] 6 ITR (Mad.)

3.

Rent for agricultural land received from sub-tenants by the mortgagee in possession is
agricultural income. Raja Mustafa Ali Khan CIT [1948] 161 ITR 330 (P.C.).

4.

Sum received from an insurance company for damage caused by hailstorm to the green leaf
forming part of the assessees tea garden is agricultural income. CIT v Gupta (Tea) P. Ltd. [1969]
74 ITR 337.

5.

from sale of jaggery was exempt from tax as agricultural income. CIT v H.G. Date [1971] 82
ITR 71 (Bom.).

6.

Nazar or Salami paid by a tenant to the landlord for the recognition of a non-transferable
holding is rent or revenue and is exempt from tax. Nawabzadi Mehar Bano Khanum v Secretary
of State 2 ITC 99.

7.

Income derived from toddy is agricultural income when it is received by the actual cultivator,
whether owner or lessee of the land on which the trees grow. If the income is obtained by a
person who has not produced the trees from which the toddy is tapped or has not done any
agricultural operation whereby those trees have been raised, it is not agricultural income. CIT v
Yagappa Nadar [1927] ILR 50 Mad 923.

8.

Weighing charges levied by a landlord from his tenants in addition to the rent under
agreement entered into with the tenant are agricultural income. The Probynabad stud farm, in re
[1936] 4 ITR 114 (Lah).

Following incomes though connected with land are not agricultural incomes :
1.

Income from sale of wild grass, bamboo and tree of spontaneous growth. Rani Tara Kumari
Devi v CIT [1946] 14 ITR 787.

2.

Income derived from land used for stone quarries. Shib Lal Ganga Ram v CIT 2 ITC 425
(A11).

3.

Income from fisheries. Raja Durga Narain v CIT [1947] 15 ITR 235.

4.

Income from land used for brick making or brick kiln purposes. Maharani Janki Kuer v CIT 5
ITC 42 (Pat).

5.

Income from land used for holding weekly (or other) markets. Beohar Singh v CIT [1948] 16
ITR 433 (Nag).

6.

Income from land or trees let out for cultivation of lac. Prov. of Bihar v Maharaja Pratap
Udai Nath [1941] 9 ITR 313.

7.

Income from ferries. Maharaja of Darbhanga v CIT [1924] ILR 3 PAT.

8.

Commission received by landlord for selling produce for and on behalf of the tenant Conville
v CIT [1936] 4 ITR 137.

9.

Income from dairying. CIT v Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466,

10.

Profit earned on purchasing the standing crop. CIT v Maddi Venkata Subbayya [1951] 20
ITR 151.

11.

Rent from land used as pastures for cattle not of agricultural purposes.

12.

If the sugarcane is ordinarily saleable in the market without any other subsequent process, the
process of converting it into jaggery or sugar will not be a process to render the produce fit to be
taken to the market.

13.

Green tea leaf is also a marketable commodity and so the manufacturing activity of tea
producers will be taxable income.

14.

Remuneration for managing agricultural property is not agricultural income. Ramaraj v

Commr. ofAgr. IT [1969] 71 1TR 108.

15.

Neither a dividend nor a deemed dividend paid out of agricultural income was itself
agricultural income. S. Kumaraswami v ITO [1961] 43 ITR 423.

16.

Income derived from letting land and trees for cultivation of lac is not income derived from
land used for agricultural purposes. Province of Bihar v. Maharaja Pratap Udai Nath Sahi [1941]
9 ITR 313 (Pat.),

17.

Compensation received for compulsory acquisition of agricultural land is neither rent nor
revenue as contemplated u/s 2(1A) and the profit realised was. not agricultural income. DLF
Housing Society v CIT [1983] 141 ITR 806 (Del).

18.

Income derived by letting out land which is assessed to land revenue for stocking timber is
not agricultural income and therefore not exempt. Har Prasad V Emperor [1925] AIR 1925 Lah
488.

19.

Interest accrued on promissory notes executed for arrears of rent was not agricultural income,
as by the new contract, the liability ceased to be one for rent and become a loan. CIT v Zemindar
of Kirlampudi [1932] ILR 55 M. 830.

Partly Agricultural Income:

There are certain incomes which are neither wholly agricultural in nature nor can they be said to
arise from business. On the other hand they include some elements of agriculture and some those
of business. Profits of a sugar mill which grows its sugarcane can be cited as one of the
examples.
In order to consider an income as agricultural income, certain points have to be kept in mind:
(i) Existence of a land.
(ii) Usage of land for agricultural operations:
Agricultural operations means efforts induced for the crop to sprout out of the land. The ambit
of agricultural income covers income from agricultural operations, which includes processes
undertaken to make the produce fit for sale in the market. 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.
(iii) Cultivation of Land is a must:
Some measure of cultivation is necessary for land to have been used for agricultural purposes.
The ambit of agriculture covers all land produce like grain, fruits, tea, coffee, spices, commercial
crops, plantations, groves, and grasslands. However, the breeding of livestock, aqua culture,
dairy farming, and poultry farming on agricultural land cannot be construed as agricultural
operations.
(iv) Ownership of Land is not essential:
In the case of rent or revenue, it is essential that the assessee has an interest in the land (as an
owner or a mortgagee) to be eligible for tax-free income. However, in the case of agricultural
operations, it is not necessary that the cultivator be the owner of the land. He could be a tenant or
a sub-tenant. In other words, all tillers of land are agriculturists and enjoy exemption from tax. In
certain cases, further processes may be necessary to make a commodity marketable out of
agricultural produce. The sales proceeds in such cases are considered agricultural income
because the producers final objective is to sell his products.

Note:
a. Agricultural income is considered for rate purpose while computing the tax liability
for Individual/HUF/AOP/BOI/Artificial Judicial Person.
b. Losses from agricultural operations could be carried forward and set off with agricultural
income for the next eight assessment years.
c. Agriculture income is computed in a manner similar to business income.
Exceptions:
a. If a person sells processed produce without carrying out any agricultural or processing
operations, the income would not be regarded as agricultural income.
b. Likewise, in cases where the produce is subjected to substantial processing which changes the
very nature of the product (for instance, canning of fruits), the entire operation is not considered
as an agricultural operation. The profit from the sale of such processed products will have to be
apportioned between agricultural income and business income.
c. Income from trees that have been cut and sold as timber is not considered as an agricultural
income since there is no active involvement in operations like cultivation and soil treatment.
Tax on sale of agricultural land:
Before 1970, profit on the sale or transfer of all agricultural land was considered rent or revenue
derived from the land. Such profit was, therefore, tax-exempt as agricultural income. There were
several favorable judgments of various High Courts on the issue. However, via a retrospective
amendment that took effect from April 1, 1970, land qualifies to be an agricultural land if the
prescribed conditions are satisfied. An agricultural land does not form part of the definition of a
capital asset and hence, there will be no capital gains on the sale of such land.
Any other land not forming part of the above will be a capital asset and sale of the same shall
attract tax on capital gains subject to Section 54B, which is explained below.
Section 54B: Capital gain on transfer of land used for agricultural purposes not to be charged
in certain cases
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:
a. The assessee must be an individual or a HUF.
b. The agricultural land should have been used for agricultural purposes. It may be a long term
asset or a short term asset.
c. It must have been used either by the assessee or his parents for agricultural purposes in atleast
two years immediately preceeding the date on which the transfer of land took place.
d. The assessee should have purchased another land, which is being used for agricultural
purposes, within a period of two years from the date of sale.

Note:
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.
e. 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.
f. The new asset purchased should not be sold within a period of three years from the date of
acquisition.
g. 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.
h. 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.
i. The return of income of the assessee should be accompanied by the proof of such deposit.
j. 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.
k. 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
two years from the date of sale of the original asset expires.

How to Calculate Tax on Agricultural income

Taxability of Agricultural income post amendment by Finance (No.2) Act, 2014
Agricultural income is considered for rate purposes while computing the income tax liability, if
following two conditions are cumulatively satisfied:
1.
2.

Net Agricultural income exceeds Rs. 5,000/- for previous year, and
Total income, excluding net Agricultural income, exceeds the basic exemption limit.
Note: If aggregate agricultural income of the assessee is up to Rs. 5,000/- during FY 2015, then
the entire income shall be exempt from tax. Accordingly, you need to disclose the agricultural
income in the income tax return (ITR) 1 form to be compliant from the disclosure perspective.
But if the agricultural income exceeds Rs.5,000, then form ITR 2 applies, which has a separate
column for disclosure of agricultural income.
Once the aforementioned conditions are satisfied then we shall compute the Tax liability in the
following manner:

First, include the Agricultural income while computing your income Tax liability.
Example Let us say that an Individual Assessee has a Total income of INR 7,50,000/(excluding Agricultural income) and a Net Agricultural income of INR 100,000/-. Then, per this
step, Tax shall be computed on INR 7,50,000/- + INR 1,00,000/- = INR 8,50,000/-. Thus, income
Tax amount as per this step shall be INR 95,000/- for an individual who is below the age of 60
Years during the P.Y. 2014-15.
Second, add the applicable basic tax slab benefit, as applicable, to the Net Agricultural income.
Thus, per our example mentioned above we shall add INR 2,50,000/- to INR 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 10,000/-.
Third, subtract the Tax computed in Second step from the Tax computed in First step = INR
85,000/-. Thus, this is the income Tax liability subject to deductions, Education Cess etc., as
applicable.
This process of computation is, however, followed only if the assessees non-agricultural income
is in excess of the basic exemption slab.
Clearly, 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.
To conclude, there is enough scope for taxing income from activities which are non-agricultural
in nature. In fact, it is well known that agriculturists themselves do not have taxable income,
taking into account the fact that when it is divided amongst family members who are involved in
agricultural operations, each one of them would have income within the exemption limit.
However, there are hundreds of thousands of middlemen like wholesalers, retailers, distributors,
etc. who earn substantial income from trading in agricultural produce as well as fruits, flowers,
etc. Such income or profits are fully taxable under the present law and, therefore, if concerted
efforts are made by the Tax Department to recover tax from them, the need for widening the tax
base to rope in agriculturists and farmers, would be eliminated.
Tax Computation Steps:
Step Description
1 Compute Agricultural Income + Total Income
2 Compute Tax on Step 1
3 Compute Agricultural Income + Maximum Amount not chargeable to tax (Basic Exemption)
4 Rebate for Agricultural Income (Tax on Step 3)
5 Compute Net Tax Payable (Step 2 Step 4)
6 Compute Education Cess at 2% on Total Tax Payable as per Step 5
7 Compute Secondary and Higher Education Cess (SHEC) at 1% on Total Tax Payable as per
Step 5

8 Compute Net Tax Payable (Step 5 + Step 6 + Step 7)

Growing and Manufacturing or Rubber/Coffee/Tea: Computation of Agricultural and Non
Agricultural Income is done
on the basis of percentage of profits of business.
Rule Description Agricultural Income Business Income
7A Income from growing and manufacture of Rubber 65% of POB 35% of POB
7B Income from grown and cured Coffee 75% of POB 25% of POB
7B Income from grown and cured, roasted and grounded Coffee 60% of POB 40% of POB
8 Income from growing and manufacture of Tea 60% of POB 40% of POB

CONCLUSION
Agriculture income is defined under sec 2 (1A) and is exempt under the Indian Income Tax Act.
This means that income earned from agricultural operations is not taxed. The reason for
exemption of agriculture income from Central Taxation is that the Constitution gives exclusive
power to make laws with respect to taxes on agricultural income to the State Legislature. While
computing tax on non-agricultural income, agricultural income is also taken into consideration.
Although agricultural income is fully exempt from tax, the Finance Act, 1973, introduced a
scheme whereby agricultural income is included with non-agricultural income in the case of noncorporate assessees who are liable to pay tax at specified slab rates. The process of computation
is as follows:

(a) Income tax is first calculated on the net agricultural income plus the assessees total income
from non-agricultural sources.
(b) Income tax is then calculated on the basic exemption slab increased by the assessees net
agricultural income.
(c) The difference between (a) and (b) is the amount of tax payable by the assessee.
This process of computation is, however, followed only if the assessees non-agricultural income
is in excess of the basic exemption slab. A method has been laid down to levy tax on agricultural
income in an indirect way. This concept is known as partial integration of taxes. It is applicable
to individuals, HUF, unregistered firms, AOP, BOI and artificial persons. Two conditions which
need to satisfied for partial integration are:
1. The net agricultural income should exceed Rs. 5,000 p.a., and
2. Non-agricultural income should exceed the maximum amount not chargeable to tax.
Yes, it is true that it is tax-free but the freedom arises neither by virtue of increase in the tax
threshold, which remains put at Rs 50,000, nor by exemptions offered by Sec. 10. It attracts
rebate under the newly inserted Sec. 88D.

Accordingly, An assessee, being an individual resident in India:

1. a) whose total income does not exceed one hundred thousand rupees, shall be entitled to a
deduction from the amount of income-tax (as computed before allowing the deductions
under this chapter) on his total income with which he is chargeable for any assessment
year, of an amount equal to hundred per cent of such income-tax;
2. b) whose total income exceeds one hundred thousand rupees and the income-tax payable
on such total income (as computed before allowing the deductions under this Chapter)
exceeds the amount by which such total income is in excess of one hundred thousand
rupees, shall be entitled to a deduction from the amount of income-tax on his total
income, of an amount equal to the amount by which the income-tax payable on such total

income is in excess of the amount by which the total income exceeds one hundred
thousand rupees. The sub clause b offers marginal relief.
Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful 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. The benefit of
Tax Exemption on Agricultural Income has not only been continued but extended to Urban Land
used for agricultural purposes.
Capital Gain on Agricultural Land is now liable to Income Tax subject to benefit of Roll-over of
Investment in Agricultural Land. Agricultural Income will continue to be taken into
consideration for Rate purposes in the like manner as under the present Income Tax Law