Agricultural Income Tax: Know the Tax Exemptions and Filing Rules

As a taxpaying citizen of India, you might have the idea that agricultural earnings are completely exempt from income taxes. But did you know that it is a common misconception and is indirectly subject to taxation? 

Approximately 58% of the Indian workforce is employed in the agricultural sector. If you are one of them, it is important to understand how agricultural income tax works in India to ensure tax compliance.  

This blog covers the income sources in the agricultural sector that are taxed, the calculation of agricultural tax and more. 

Quick Synopsis

• Total agricultural income under ₹5000 per year is tax-exempt.
• Income from nurseries, selling replanted trees, and renting agricultural plots is taxable.
• Business taxes on agricultural products like tea (40%) and rubber (65%); the rest is tax-exempt.

What Income Sources Can be Listed Under the Agriculture Income Tax Form?

One can go through Section 2 (1A) of the IT Act to find out the conditions that point out sources generating agricultural income. As per the definition of this section, the following income sources are eligible to be considered as agricultural income:

• Money earned through vegetation grown in nurseries as saplings or seedlings.
• Income generated from selling replanted trees is taxable as agricultural income tax.
• Leasing/renting out agricultural land to be used for cultivation, as a storeroom, outhouse or residential place. 
• Renting/leasing an agricultural plot by a farmer
• Income earned through the commercial use of agricultural land falls under the taxes on agricultural land

However, there are a few exceptions too that segregate agricultural income and agricultural taxation from other types of similar income sources. These include:

• Revenue earned by selling processed produce of agricultural goods without getting involved in agricultural activities. For example, if you grow tea leaves in India, manufacture tea and sell it, you are liable to a 40% tax on your business income.
• Earnings from the sale of trees that have been sold as timber.
• Revenue earned from extremely processed produce.

What Is the Treatment of Agricultural Income Tax in India?

In India, the agricultural income tax return rules differ from other categories of income. As per the ITR norms, agricultural income should not be considered while calculating the tax liability of a family or entity.

However, the Income Tax Department indirectly levies taxes on agricultural income by implementing a technique named partial integration of agricultural income with non-agricultural income. By this rule, the relevant authority levies taxes on non-agricultural commodities or services at comparatively higher rates.

The taxability of agricultural income has been summarised as follows:

The tax exemption is extended to Hindu Undivided Families (HUFs), AOPs (Association of Persons), BOIs (Body of Individuals) and artificial judicial persons. Simultaneously, the exemption rules do not apply to cooperative societies, LLPs, companies or any local bodies.

To use the agricultural income tax return form correctly, the concerned party must meet the following conditions.

If their net income is more than ₹5,000 in a year and non-agricultural earnings cross the basic exemption limit, the below-mentioned thresholds will apply:

• For persons below 60 years of age and other individuals (as per the old tax regime): More than ₹2.5 lakh
• For persons between 60-80 years of age (as per the old regime): Income more than ₹3 lakh
• For those who are more than 80 years of age (under the old regime tax slab): Income greater than ₹5 lakh
• For all people, irrespective of someone’s age (under the new tax regime): Income more than ₹3 lakh

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Different Types of Agricultural Income

In the table below, you can take a look at the various types of agricultural income to better understand agricultural income tax:

Calculation of Agricultural Income Tax

If an eligible entity’s agricultural taxation is contained within ₹5,000, they must seek an income tax refund for agriculture through ITR 1. Otherwise, one must access ITR 2, wherein they get a dedicated column for listing down the particulars of their income.

The tax calculation shown below is in line with Section 2(1A) of the Income Tax Act, given that your earnings come from agricultural sources.

Formula to determine the total amount of due tax:

Agricultural income + non-agricultural income = A

Net agricultural income + basic exemption limit = B

Total tax due amount = B-A

For other normal instances, the computation of tax will include the following steps:

• Consider the Agricultural Income: In this stage, you consider an individual’s base income (B) and their agricultural income (A). First, the tax amount is calculated on the cumulative amount, i.e., B+A. You can refer to this tax as T(B+A).
• Add the Basic Tax Slab Benefit: Based on the updated regulations of the Income Tax Department, the tax slab rates may change. However, for this scenario, let’s consider this slab as S. This amount must be added to A and a separate tax is computed on this amount. You may refer to this as T(S+A).
• Find Out the Income Tax Liability: Eventually, this is the tax amount that can be deducted from agricultural income. Thus, the agricultural income tax will be T(B+A) – T(S+A). 

Note that even though agricultural income is exempt from tax, it must be reported in the annual income tax return, just like income from fixed deposits.

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Final Words

You can claim an agricultural income tax exemption by filing ITR-1 if your agricultural income is up to ₹5,000. Otherwise, you need to file ITR-2 to accurately report your agricultural income. If the specifics overwhelm you, it is highly advised to take the help of a qualified CA while filing returns.