The common perception among general public tells that Agriculture Income is totally exempt from taxation.
Through this article we will analyse into this perception and the provision of taxation on agriculture income
What is the meaning of Agriculture Income?
As per section 2(1A) of the Income Tax Act, Agriculture income means:
1) Income from sale of agriculture produce
2) Rent from Agriculture Land being used for agriculture purpose
3) Rent from house being used as store house or dwelling house
4) Income from nursery
Agriculture income from agriculture activity on Urban land will attract the same provision of Taxability as is applicable on land situated in Rural areas
Taxability of Agriculture Income
Agriculture income is exempt under section 10(1) of Income Tax Act, 1961 if received in India (Agriculture income from any other country will be taxable)
BUT for the computation of tax, one has to consider agriculture income if the following conditions are satisfied:
1. Assessee is Individual, HUF, AOP, BOI, AJP
2. Agriculture Income more that ₹5000
3. Non agriculture income is more than basic exemption limit.
Let us understand the computation through an easy illustration.
Compute the net tax liability of Mr X (Age 30 years) having :
Agriculture income ₹ 4,00,000
Non Agriculture Income ₹ 10,00,000
A. Tax liability on Agri +Non Agri Income (₹4 Lakhs + ₹10 Lakhs) = ₹ 2,32,500
B. Tax liability on Basic exemption + Agri Income (₹2.5 Lakhs + ₹4 lakhs) = ₹42,500
C. Calculate A-B ( ₹2,32,500 – ₹42,500) = ₹1,90,000
D. Add Cess @ 4% = ₹ 1,90,000 + ₹7600 ( 4% * 1,90,000 )
E. Net Tax Liability = ₹ 1,97,600
Now If the assessee had no agriculture income, his tax liability would have been equal to tax on ₹ 10 Lakhs = ₹ 1,17,000
This method of computation of tax is known as Partial Integration Method
This is to be noted that this method is NOT applicable in following cases:
1. Partnership firm , LLP or Company or Cooperative Society or Local Authority
2. In case of Long term Capital Gain/Short term Capital Gain u/s 111A/Casual Income
Determination of nature of income : Agriculture Income or Income under the head PGBP
As per the meaning of Agriculture Income under section 2(1A) , Income from sale of agriculture produce is considered under agriculture income with one exception under Rule 7.
Rule 7 : As per Rule 7, in case an assessee sell agriculture produce after process and where such process is not mandatory or compulsory to effect such sale, Income from such sale will be bifurcated into agriculture and Business income as follows:
Agriculture Income is equal to
Fair market value of Agri product before further process
less: Cost of Agri product
AND
Income under the head profit and Gain from Business and Profession (PGBP) is equal to
Sale of Final Product
less: Fair market value of Agri product before further process
less: Cost of Agri product
Special Rules for Tea, Coffee, Rubber
Rule 7A : Growing and manufacturing of Rubber
Agriculture Income : 65%
Business Income : 45%
Rule 7B : Growing and manufacturing of Coffee
a) Grown and Cured
Agriculture Income : 75%
Business Income : 25%
b) Grown, Cured, Roasted, Grounded
Agriculture Income : 60%
Business Income : 40%
Rule 8 : Growing and Manufacturing Tea
Agriculture Income : 60%
Business Income : 40%
Points to remember
Such bifurcation is to be done after claiming deduction u/s 33AB and other deductions available under PGBP including depreciation.
Thus, although the agriculture income is exempt under section 10(1), it cannot be called to be fully out of purview of taxation.
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Disclaimer : This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.
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Please note a correction in this article.
Under Rule 7A, percentage of Business income should be 35% instead of 45%.