What is the limit of exemption for agriculture income? Is Agricultural Income really tax free?

Since we have records available, agriculture is known to be the primary occupation of a major part of the population of India. For its food requirement, the country is dependent on crop produce. All governments have periodically launched schemes and amended existing ones, to ensure there is substantial growth in this main sector of the economy and one such move is to provide tax exemption on agricultural income. Let us look at this in detail.

What is Agricultural Income?

The meaning of agricultural income is different in the Income-tax Act which comprises of the following three:

• Any revenue or rent received from any agricultural land in India. This does not pertain to the income earned from the selling of agricultural land.
• Any income earned from agricultural land from the following activities:

• Agriculture; both basic and subsequent activities. Basic operations comprise cultivation which included different activities that are performed using human skills and have an effect on the land.
• Any process by the owner of the land who receives the rent in a non-monetary way or the cultivator that results in agricultural produce which can be taken to the market to be sold
• By sale of the produce of the agricultural land

• Any income attributable to a farmhouse that is required for operations for agriculture. The building has to be situated close to the land and is required as a warehouse or as a house for residential purpose 

If none of these conditions is met, then the land should not be located in the following area:

*Municipality includes notified area committee, municipal corporation, town committee, town committee and cantonment board.

The Exclusions

The following are the exclusions to the agricultural income:

• Revenue earned from produce that is extremely processed
• Revenue earned from selling agricultural produce without any agricultural activity
• Revenue earned from selling trees as timber

Important Points

Only the following income is considered as valid agricultural income:

• Income is earned from a piece of land that already exists
• Income should be earned from produce which is got by cultivating the land
• Income can be from land which is only used for agricultural purposes
• Income can be earned from land which is not under the ownership of assessee’s

Agriculture income is exempt under section 10(1) of the Income-tax Act.

However, it is included for tax rate purposes in computing the total Income-tax liability if the following two conditions are cumulatively satisfied:

1. Net agricultural income is more than INR 5,000/-
2. Total income, excluding net agricultural income, is more than the basic exempt slab limit

If the above two conditions are satisfied, then tax is computed as under:

Step 1:

Compute Income-tax liability on total income including agricultural income.

Step 2:

Compute tax rebate on agricultural Income.

Tax rebate on agricultural income is Income-tax computed on a total of agricultural Income + basic exempt slab limit

Step 3:

Subtract the amount computed in Step 2 from the amount computed in Step 1 to get the amount for total tax payable by the Individual.

As per Income-tax Act, income earned from any of the under given three sources means agricultural Income;
(i)   Any rent received from land which is used for agricultural purposes.
(ii)  Any income derived from such land by agricultural operations including processing of agricultural product, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
(iii) Income attributable to a farmhouse subject to the condition that the building is situated on or in the immediate vicinity of the land and is used as a dwelling house, storehouse, etc.

Now income earned from carrying nursery operations is also considered as agricultural income and hence exempt from income-tax.

Tax on Sale of Agricultural Land

Prior to 1970, if there was a profit due to transfer or sale of agricultural land it was considered to be revenue and was exempted from income tax as it was not considered to be agricultural income. Then on April 1, 1970, an amendment was made according to which agricultural land is not considered to be a capital asset and thus, any income on the sale of the land will not be considered to be capital gains. 

Section 54B

Under Section 54B, the taxpayer gets relief if he sells his land which is agricultural in nature and buys another agricultural land from the amount received. The following conditions have to be met for this purpose:

The assessee has to be a HUF or an individual

• The land can be a short term or a long-term asset but must be used for agricultural purposes
• For at least 2 years immediately before the land was transferred, the assessee or his parents should have used the land for agricultural purposes
• The other land which the assessee has purchased must also be used for agricultural purposes
• If the entire amount of sale price is not used in purchasing another land, the tax will be levied on the difference
• The new land cannot be sold for three years from the date it has been acquired

It must be understood that most of the farmers who are cultivating the land do not have any taxable income as usually their income is divided among the family members. On the other hand, from the field to the market, there are many middlemen involved who earn considerable income and this comes under the purview of taxable income. The Income-tax rules are very clear on the treatment of income as agricultural income but more efforts need to be made to ensure everyone who is eligible to pay taxes, pays the same. 

FAQs

1. Is agricultural income exempt from income tax?
   Income from agriculture is exempt if the net agricultural income is less than Rs.5000 or if the total income apart from agricultural income is less than the exemption slab limit on agricultural income.
   
   
2. What is Section 54B?
   This is the section that provides relief to the taxpayer when he sells his agricultural land and uses the proceeds to buy another one
   
   
3. Does income from animal husbandry become a part of agricultural income?
   Any income from animal husbandry is not considered to be a part of agricultural income.
   
   
4. If agriculture is carried on urban land, is the income considered to be agricultural income?
   Agriculture can be carried out on rural or urban land and the income earned from selling produce is treated as agricultural income and will be exempted
   
   
5. How is income from selling agricultural produce treated if it is grown and sold by an industrial organization?
   Agricultural activities can be carried out by an individual or an industrial organization and this does not affect the treatment. If the organization sells the produce as raw materials then the income earned from the same will be exempted. On the other hand, if the produce is sold as finished goods then the treatment will be as per the Rule 7, 7A, 7B and 8 of the rules of Income-tax.