Agricultural Income – Taxability & Treatment

What is the taxability of agricultural income in India?

As per Section 10(1), any income derived from the agricultural land shall not be included in Total Taxable Income.
Now, the question arises,

What is an agricultural income in India?

As per Section 2(1A) of the Income Tax Act, agricultural income can be defined as follows:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

(b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.

(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Also, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

How much agricultural income is exempt from income tax?

There is a complete tax rebate on agriculture income in these cases

• If your total agricultural income is less than Rs. 5,000;
• If the income from agricultural land is your only source of income i.e. no other income;
• Where you have both agricultural income and other income and if the total income excluding such agricultural income is less than the basic exemption limit.

But, in case, your agricultural income exceeds Rs. 5,000 and you have other sources of income too, then, the tax liability for that year is to be calculated following the procedure as under:

• Compute income tax on the aggregate income (i.e. agricultural income + other income) as per the prevailing income tax rates.
• Compute income tax on sum of amount of basic exemption limit plus agricultural income as per the prevailing income tax rates.
• Now, Compute (1) – (2) to arrive at the tax liability for the year.

How to calculate tax on agriculture income for AY 2019-20 ?

Suppose, you earn Rs. 4,00,000/- as salary income and Rs. 90,000/- as agricultural income for the assessment year 2018-19 or 2019-20.

The computation shall be as follows:
a. Calculate tax on total income of Rs 4,90,000

b. Calculate tax on basic exemption limit + agricultural income i.e.

The tax liability, in this case, shall be Rs. 7,500 (a-b) i.e. Rs 12,000 – Rs 4,500 and there’s no extra tax payable owing to the extra income of agriculture.

*Please note that Rebate u/s 87A, surcharge , Cess will be applicable in addition to the tax calculated. Standard deduction of Rs. 40,000 has not been considered in the example.

But, you might have to pay some tax on agriculture income in certain cases.

Say, you’ve earned salary income of Rs 2,80,000 and agricultural income of Rs 3,50,000 during the A.Y. 2018-19 or 2019-20.

a. Calculate tax on total income of Rs 6,30,000

b. Calculate tax on basic exemption limit + agricultural income i.e.

Therefore, even though agricultural income is exempt, you’ll have to pay some tax on agricultural income.

Treatment of Agricultural Land in Capital Gain

Section 54B gives relief of capital gains to a taxpayer who sells his agricultural land and from the sale proceeds acquires another agricultural land. The conditions for claiming the benefit u/s 54B are:

• Assessee should be an individual or HUF;
• Asset transferred should be agricultural land, whether a long-term capital asset or short-term capital asset. (It is important to know here that rural agricultural land or agriculture land in rural area is not a capital asset, and hence, exempt from capital gains)
• The agricultural land should be used by the individual or his parents or any member of HUF for agricultural purposes at least for a period of two years immediately preceding the date of transfer of land, and
• The taxpayer should acquire another agricultural land within a period of two years from the transfer date.

However, as per section 10(37), no capital gain would be chargeable to tax in case of an individual / HUF, if the agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and consideration received on or after 01.04.2004.

What is agriculture Income Tax Exemption limit under Section 54B?

The amount of exemption u/s 54B shall be the lower of the following:

• Amount of capital gains arising on transfer of agricultural land; or
• Investment in a new agricultural land or the amount deposited in Capital Gains Deposit Account Scheme.

Let’s say, you sold an agricultural land in April, 2017 for Rs. 25,20,000 and the long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. In December, 2017 you purchased another agricultural land worth Rs. 5,00,000. Then, the agricultural income tax calculation for AY 2019-20 in your hand would be calculated as follows:

(*) Exemption under section 54B will be lower of following:

(i) Amount of capital gains arising on transfer of agricultural land i.e., Rs. 8,40,000; or

(ii) Investment in new agricultural land i.e., Rs. 5,00,000.

Thus, the exemption will be of Rs. 5,00,000.

Also, in case, if a taxpayer purchases a new agricultural land just to claim exemption u/s 54B and subsequently transfers the new agricultural land within a period of 3 years from the date of its acquisition, then the benefit granted under section 54B will be withdrawn.

How to show agricultural income in ITR 1?

Agricultural income in ITR 1 is to be shown under the column of Agriculture Income. But ITR 1 can only be used if the agricultural income is upto Rs 5,000. In case the said income exceeds this limit form ITR-2 is required to be filed.

We hope now there’s clarity on how much tax is actually payable by you on the earnings from the agricultural land and the benefits of agricultural land in capital gain!