Last Updated on January 13, 2023 by Ravi Sankar Robbi
Majority of the Indian Economy depends on the agriculture. Though agricultural income is exempt from tax under sec 10(1), you need to satisfy certain conditions to avail the full exemption of such income.
In this article, we will try to get some basic understanding regarding the tax treatment of income arising from agricultural land.
Basically, taxability on agricultural land arises in two different ways.
- Agricultural Income arising from such land
- Capital Gain from sale of such agricultural land
Now, we will discuss the taxability in these 2 scenarios. But, before that let’s first understand the definition of Agriculture Income in simple terms.
Agricultural Income as defined in Sec 2(1A) of Income Tax Act is as follows,
(i) any Rent from agriculture land
(ii) income derived by agriculture process
(iii) income from sale of produce &
(iv) income from Farm building
Now the main question comes, whether such agriculture income is taxable or not?
Taxability of Agriculture Income
If you are covered under either of the categories mentioned below, then you need not pay any tax on your agricultural income.
- Your total income consists of ONLY agricultural income
- Having both Agriculture income & Non-agriculture income; Agriculture income is not more than Rs. 5,000 and Non-agriculture income is not more than basic exemption limit.
You might be wondering, when agricultural income would be taxable?
Simple, exactly opposite to what we have discussed in Category 2 above.
Meaning, if you are an Individual and having both Agriculture & Non-agriculture income; Agriculture income is more than Rs. 5,000 and Non-agriculture income is more than Basic Exemption Limit. In such case, your Agricultural Income will be taxed as per Partial Integration method.
What does it mean?
Though you are not directly paying the tax on agricultural income, Dept is indirectly collecting through the Partial Integration method.
For example, imagine you are having an agricultural income of Rs. 7,000 and non-agricultural income of Rs. 3 lakh. Since your agricultural income is more than Rs. 5,000 and non-agricultural income is more than basic exemption limit, your agricultural income will be taxable under partial integration method, which is as follows:
Step1: Calculate tax on Agricultural + Non-agricultural income as per slab rates
Step2: Calculate tax on Agricultural income + Basic Exemption Limit (as applicable to you)
Step3: Deduct tax arrived in Step 2 from Step 1 i.e. Tax from step 1 – Tax from step 2
Step4: Apply Rebate, Surcharge & HEC on tax arrived at Step 3, to arrive the final tax liability
This is how the calculation would be, if you are having both Agricultural and Non-agricultural income.
Taxability on Sale of Agriculture Land
Now, we will discuss the taxability of gain from sale of Agricultural land.
When you sell agricultural land for a gain, taxability of such gain depends on the location of the land. Basically for the purpose of capital gains, agricultural land is divided into 2 categories.
- Rural Agricultural land
- Urban Agricultural land
Rural Agriculture land – Gain from sale of such land will not be taxable, as the same is not covered under the definition of Capital Asset
Urban Agriculture land – Gain from sale of such land will be taxable under the head Capital Gains, unless you invest such gain in another agricultural land within the specified time period
This is how the gain from sale of agricultural land is taxable.
With this, now at least you got some basic idea about the taxability of agricultural land.
In upcoming articles, we will understand more about the agricultural income taxation.
Thanks for your time.
Author is a Qualified CMA with an experience of more than 8 years in the industry. He is also an All India Rank holder in both Inter (AIR-26) & Final (AIR-46) examinations of ICAI. He loves to writes articles on Income Tax & GST.