Agricultural income: Taxation of income from agricultural land

[ecis2016.org] According to the tax laws, a person can earn agricultural income and non-agricultural income from agricultural land. We look at the activities that qualify for each and how such income is taxed

As India is basically an agrarian economy, several incentives and perks are offered to those making a living through agriculture, known as agricultural income. Farmers are, for example, exempted from paying any tax on their agriculture income under the income tax laws in India.

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States are responsible for the taxation of agricultural income in India, as the Seventh Schedule, Entry 82, of the Union List mentions taxes other than agricultural income while Entry 46 in the state list mentions taxes on agricultural income. Section 2 (1A) of the Income Tax Act defines agricultural income as rent/revenue from land, income derived from this land through agriculture and income derived from buildings on that land. Section 10 (1) of the tax law excludes agricultural income from the computation of total income.

There has, in fact, been a lot of debate on the merits of keeping an unlimited amount of agricultural income out of the purview of taxation. Those against the concept argue that making agricultural income entirely tax-free, amounts to wide misuse of the lacuna in the system by rich land owners.

However, not all income generated from investing in farmland, qualify as agricultural income. Consequently the owner has to pay taxes on it. Thus, it’s pertinent to know the difference between incomes that fall in the agricultural category and the non-agricultural category.

Agricultural income: Definition and meaning

Section 2(1A) of the Income Tax (IT) Act, 1961, defines agricultural income and broadly demarcates it into three categories.

1. Rent or revenue generated from agricultural land

Farmers can use their agricultural land to generate rent or revenue in various ways. One common way in which landlords in India generate income from agricultural land, is by allowing cultivators to use their land on a lease basis, for farming. None of these incomes will be taxed, as provided under Section 10(1), which states that agricultural income earned by the tax payer in India is exempt from tax.

Note here that agricultural operations must be performed on the land to claim the benefits. Also, the farmer will have to prove his ownership over the land, to claim the benefit.

2. Income derived from agricultural land

The human effort involved in producing crops is extremely valuable and hence, income generated by putting in effort and skill through agricultural operations, is also exempt from tax. Agricultural operation means efforts made to produce crops on a land and measures taken to make the produce fit for sale. These broadly include:

• Cultivation of the land
• Tilling of the land
• Sowing of seeds
• Planting
• Weeding
• Tending
• Pruning
• Cutting
• Harvesting

It is pertinent to note here that the owner will also have to be the cultivator, to claim tax exemption.

3. Income from farm building required for agricultural operations

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House owners are liable to pay tax on the annual value of their immovable assets under the head ‘Income from house property’ as prescribed in the tax laws. However, residences, outhouses, farmhouses and any units lying close to the agricultural land of an owner, are exempt from paying any tax. However, distance plays a major role in deciding whether or not the building would be exempt from paying tax.

• The land should not fall within the jurisdiction of a local municipality with a population of less than 10,000.
• The land should be at least two kilometers away from a municipality with a population between 10,000 and 1 lakh.
• The land should be at least six kilometers away from a municipality with a population between 1 and 10 lakhs.
• The land should be at least eight kilometers away from a municipality with a population of over 10 lakhs.

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4. Income derived from saplings or seedlings grown in a nursery

No tax liability arises on the income generated through sale of products grown in a nursery provided:

• The land revenue has to be assessed by the local.
• The land should not be situated within the jurisdiction of a municipality or a cantonment board where the revenue is not assessed or not subject to local rate.

Non-agricultural income

As mentioned earlier, certain agriculture-related works and the income thus generated, is categorised as non-agricultural income and is taxable.

Heavy processing: When an agricultural produce undergoes a process to become marketable, the final product is categorised as non-agricultural. For example, the production of tea, coffee, rubber, etc. Also, if a farmer sells processed items without carrying out any agricultural or processing operations, the income would be categorised as business income.

Breeding of livestock: This includes dairy animals, fishery and poultry farming on agricultural land.

Tree plantation: Trees grown on farmland only to be used as timber, fall in the non-agriculture category, as no active agricultural business has been concluded in the entire process.

Trading: Those who earn their income by trading agricultural produce, have to pay standard taxes on their income.

Export: Income earned from the export of agricultural produce, could be exempt from IT if certain conditions are satisfied.

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Taxation of agricultural income

If a farmer is generating agricultural income, along with non-agricultural income, he will have to calculate the taxable income. The need to do so would arise, only if his net agricultural income is greater than Rs 5,000 during the year and his non-agricultural income is higher than the maximum amount not chargeable to tax under the tax slab.

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This means that the non-agricultural income should be more than Rs 2.50 lakhs for individuals below 60 years. It should be more than Rs 3 lakhs for farmers aged between 60 and 80 years. For people aged over 80 years, the non-agricultural income should be over Rs 5 lakhs, to be taxable.

Formula to calculate tax liability

To arrive at the taxable income, the farmer must first deduct the agricultural income from the total income.

Suppose a farmer, aged 50 years, earns Rs 5 lakhs as income in a year. Of this, Rs 40,000 is agricultural income, while the remaining amount is non-agricultural income.

Rs 5 lakhs-Rs 40,000= Rs 4.60 lakhs

Considering his age, the farmer gets an exemption of Rs 2.50 lakhs on his annual income.

Taxable income: Rs 4.60 lakhs-Rs 2.50 lakhs=Rs 2.10 lakhs

Under the existing slab, the farmer will have to pay 5% of the remaining amount in tax.

Tax on sale of agricultural land

Tax liability will arise on capital gains, if the farmer sells his agricultural land for compensation. However, no tax liability arises if the land is being acquired by the government.

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Land sale by NRIs in India

Non-resident Indians (NRIs) who own land or any other type of immovable property in India, have to seek a prior permission from the banking regulator, the RBI, before they initiate the sale, the Supreme Court (SC) has ruled. The top court made this observation, while delivering its judgement in the John Divianathan verus Vikram Malhotra case in February 2021. In this case, one FL Raitt gifted a Bengaluru-based property owned by her late husband, Charles Raitt, a foreigner, to Vikram Malhotra in 1977, without getting the RBI’s permission.

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