Tax On Agricultural Income Know It All!

September 15, 2016 - Income Tax Learning

(Last Updated On: November 12, 2016)

Today, agriculture plays a vital role in Indias economy and over 50% of Indias workforce is engaged in agricultural activities.
From the surface, it appears that agriculture income is exempt from income tax, but its not as easy as it appears. Lets get
into the details of agricultural income and its taxation!

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 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 can be treated as agricultural income?

As per section 2(1A) of the Income Tax Act, it 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 specied 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.

So, is agricultural income wholly exempt from income tax?

Yes, it is wholly exempt in the following situations:

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, if the total income excluding such agricultural income is
less than 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.

Compute (1) (2) to arrive at the tax liability for the year.

Suppose, you earn Rs. 3,00,000/- as salary income and Rs. 50,000/- as agricultural income for a year. The computation shall be
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 as follows:

Step 1: Income tax on Rs. 3,50,000/- i.e. Rs. 10,000/-. (Income exempt upto Rs. 2,50,000/- and taxable @10% on Rs. 1,00,000/-)

Step 2: Income tax on Rs. 3,00,000/- [2,50,000 + 50,000] i.e. Rs 5,000/-. (Income exempt upto Rs. 2,50,000/- and taxable @10% on
Rs. 50,000/-)

The tax liability in this case shall be Rs. 5,000 and theres no extra tax payable owing to the extra income of agricultural
income.

But, you might have to pay some tax on agriculture income in certain cases. Say, youve earned salary income of Rs 2,80,000
and agricultural income of Rs 3,50,000 during the A.Y. 2016-17. then tax on it will be computed as under:

Step 1: Income tax on Rs. 6,30,000 i.e. Rs. 51,000 (Income exempt upto Rs. 2,50,000, tax @10% on next 2,50,000 and @20% on
the remaining 1,30,000)

Step 2: Income tax on Rs. 6,00,000 [2,50,000 + 3,50,000] i.e. Rs 45,000. Income exempt upto Rs. 2,50,000, tax @10% on next
2,50,000 and @20% on the remaining 1,00,000)

Thus, in the above case, nal tax liability comes upto Rs. 7,000 (51,000-45,000). Therefore, even though agricultural income is
exempt, youll 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 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 purpose at
least for a period of two years immediately preceding the date of transfer of land, and
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 The taxpayer should acquire another agricultural land within a period of two years from 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.

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

Lets say, you sold an agricultural land in April, 2015 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, 2015 you purchased another agricultural land worth Rs. 5,00,000. Then, the
amount of taxable capital gains for 2015-16 in your hand would be calculated as follows:

Particulars Amount (In Rs.)

Long-term capital gain arising on transfer of old land 8,40,000

Less: Exemption under section 54B (*) 5,00,000

Taxable Long-Term Capital Gains 3,40,000

(*) 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

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 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.

We hope now theres 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!

And in case, you still have a doubt, we are always here to assist you! Contact us at support@tax2win.in or call +91-9660996655!

Author

Team Tax2win

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