What is Agricultural Income and its Taxability. This article is about the meaning of agriculture income, how it is calculated, why it is not taxable, examples of what are treated as agriculture income and what are not, cases when there is agriculture income along with manufacturing process-how it is calculated then, cases when agriculture rural land is sold in exchange of new agriculture land is produced. So this article talks all about the Agricultural Income and its Taxability
What is Agricultural Income and its Taxability
Definition of agriculture income:
The definition of agriculture income is given under section 2(1A) of the Act, which defines that any income from the following sources will be treated as agriculture income:
- Any revenue from the land which is situated in India and which is used for agricultural purposes and not only that but also the rent received from the land there of for the said purposes will be treated as agricultural income.
- Any revenue received by the cultivator or the owner there of which income is derived from the agricultural produce from that particular agriculture land and receiver of the rent is also exempt.
- Any revenue from the farm building is exempt, but only if following conditions are satisfied:
- The land is used for the purpose of storage or as a dwelling house.
- The land should be occupied by cultivator or the land should be in ownership of it.
- The farm building should be in the immediate vicinity of the agricultural and should not be away form the agricultural land.
- The farm building must be assessed to land revenue in India.
Examples where agricultural income is exempt:
Agricultural income is exempt when the income is received from the following sources such as from income from sale of growing flowers, creepers and selling it, share of profit from the partner of the firm engaged in agricultural activities, income from replanted trees, rent received from agricultural activities.
Examples where agricultural income is not exempt:
Agricultural income is not exempt when the income is received from butter and cheese making, TV shooting in the farm house or in the agricultural land, bee hiving income, dairy farming income, standing crop income, royalty income from mines, sale of spontaneously grown trees, etc. However the above list is illustrative list, and not exhaustive. There may be many cases where the income tax department disagrees with the source of income and disallow the same as agricultural income.
Why agricultural income is not taxable??
Any law in India should be enacted within the framework and the norms prescribed in constitution of India. Under the constitution, it is said that Parliament of India has no power to levy tax on agricultural income. The whole and full authority ahs been given to state government to charge or not to charge income arising from agriculture income. That is the reason why income from agricultural income is exempt.
Cases when there is involvement of agriculture along with manufacturing process:
There may be certain cases where manufacturing processes are required to be carried before selling the agricultural produce to the market. These are the cases when the purpose of agriculture cannot be separated. When it is not possible to segregate the income, than market value is aggregate of expense of cultivation and the reasonable profit added there on. How to calculate tax on such incomes is discussed here by way of specified rules which are prescribed:
- Under Rule 7A, Rubber and it s produce is covered where agricultural income is treated as 65% and business income as 35%
- Under Rule 8, Tea and it s produce is covered where agricultural income is treated as 60% and business income as 40%
- Under Rule 7B(1), Coffee grown and cured is covered where agricultural income is treated as 75% and business income as 25%
- Under Rule 7B(1A), Coffee grown and cured along with roasting and grounding is also covered where agricultural income is treated as 60% and business income as 40%
Tax Calculation on Agricultural Income
For taxing the agricultural income, income tax department has provided the indirect method of calculating the tax in agriculture income. Although the income tax department has provided various exemptions for agricultural income under section 10(1), agricultural income along with non agricultural income is taxable as a way that non agricultural income will be taxable at a higher rate with its method of computation. Indirect method of computing tax for agricultural income is only applicable to Individual, HUF, Association of person, unregistered firm and not to other assessees. To the other assessees, tax on agricultural income is calculated at maximum marginal rate. Indirect method is applicable only if:
- Agricultural income is Rs. 5000 or more.
- Non agricultural income is exceeding the maximum amount not chargeable to tax.
How to Tax liability??
Step-1 Calculate the total income (Both agricultural and non agricultural)
Step-2 Calculate the tax on above total taxable income according to the current slab rates.
Step-3 Calculate the income of agricultural income and the current maximum amount upto which tax is not applicable.
Step-4 Calculate the tax on above Step-3.
Step-5 Calculate the difference between Step2-Step4 (This amount is liable for tax)
The greatest disadvantage of the indirect method to the tax payers have to pay more tax on the non agricultural income than the normal one. It is because due to considering the agricultural income in the taxable income, the non agricultural income will come in the higher tax slab. I will explain this concept with the help of example.
Example – Mr A, having non agricultural income of Rs. 600000 and agricultural income so Rs. 1000000. Calculate the tax liability according to the current slab rates and considering the Section 10(1) exemption.
There may be 2 situations were tax can be calculated:-
Situation 1 – Normal taxability
Agricultural income u/s 10(1) is exempt, so Rs 1000000 is totally exempt.
Other non agricultural income is taxable :
Rs.600000 – Rs.250000 = Rs.350000
Tax on Rs.350000 = 25000 (250000*10%) + 20000 (100000*20%)
Total Tax = Rs.45000
Situation 2 – Taxability by Indirect method
So we can make analysis from the above two situations where it is clearly seen that in first situation tax liability comes to Rs.45000 and in the second situation it comes to Rs.82500 which is almost double.
Tax on Sale of Rural Agriculture Land:
There is exemption from paying tax on sale of Rural agriculture land because the meaning capital gain does not cover the word rural agriculture land and hence it is exempt. But the other land which is not rural but used for agriculture purpose will be liable for payment under section 54B. This section gives some benefits for those taxpayers who sale agricultural land and buy the new agriculture land from the sale proceeds of the old one. But there are some conditions which needs to be satisfied. They are:
- Assessee must be individual or HUF
- Land must have been used for agriculture purpose.
- Sold land must be used as agricultural purpose for preceding 2 years and the land to be purchased within 2 years from the date of sale.