What Is Agriculture Income?

While there has been an ongoing debate over the logic behind extension of this largesse for so many years, those earning an agriculture income have been kept exempt under the India tax laws. (NITI Aayog member Bibek Debroy recently stirred up a controversy of sorts when he opined that income from agriculture beyond a certain threshold should be taxed.) According to Section 10(1) of the Income Tax (I-T) Act, 1961, agricultural income earned by the taxpayer in India is exempt from tax.

What constitutes agriculture income?

It is not only the value of the agricultural produce that is defined as agricultural income; the definition of the terms is quite wide. Section 2(1A) of the Act defines what agriculture income is. According to this Section, the following are considered as agriculture income:

Any rent or revenue derived from land which is situated in India, and is used for agricultural purposes.

Rent or revenue from the agricultural land and income earned by way of sale of produce are exempt from tax only. However, agricultural operations must be performed on the land to claim the benefits. This in case, the farmers will also have to prove his ownership over the land.

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.

Agricultural operations mean efforts made to produce crops on a land, and measures taken to make the produce fit for sale. As far as agricultural operations go, the cultivator need not be the owner of the land to claim tax exemption.

Any income attributable to a farmhouse subject to satisfaction of certain conditions as mentioned in Section 2(1A) .

Based on its notional annual value, a property owner has to pay tax on property he owns, even if he is not using this unit as his residence. The notional profit taxed as income from house property. However, farmers do not have to pay any tax on farmhouses they own if the unit is lying close to their agricultural land and is being used as a storage unit or outhouse.  Even if the property is being used as the farmer's current residence, he will not be liable to pay any taxes.

Also read: Listing 8 Real Estate-Related Transaction That Are Tax-Free

Any income derived from saplings or seedlings grown in a nursery.

On income earned through sale of produces grown in your nursery do not have any tax liability.

To claim the benefits, the assessee has to fulfill certain conditions:

The law says that the land revenue has to be assessed based on the local rate by officers of the government.

Where the revenue is not assessed or not subject to local rate, the land should not be situated within the jurisdiction of a municipality or a cantonment board.

The revenue should not include profits arising out of transfer of the land.

What does not constitute agriculture income?

Certain agriculture-related works and income generated through these channels do not fall in the category of agricultural income. These include:

If a farmer sells processed produce without carrying out any agricultural or processing operations, the income would be categories as business income.

When a rigorous process is followed to increase the salability of an agriculture produce, the income earned through the sale of that product would not quality to be agricultural income. If mangoes produced in your farm are being turned into jams, for instance, the income generated through the sale will be taxable as business income.

Breeding of livestock ─ this includes dairy animals, fishery, poultry farming ─ on agricultural land is not agricultural operations.

If you grew trees on your farmland only to sell them at a later stage as timber, the income earned this way will not be regarded as agriculture income. The legal view is that no active agriculture business has been concluded in the entire process.

Those who earn their income by trading agricultural have to pay standard taxes on their income.

Income earned from export of agricultural produce could be exempt from income tax if certain conditions are satisfied.

Noteworthy

In case a taxpayer is also earning non-agricultural income, the twin incomes will be combined to do the tax calculation, and benefits will be provided accordingly. Do note here that computation of tax liability is followed only if the taxpayer's non-agricultural income is in excess of the basic exemption slab. Those earning up to Rs 2.5 lakh of non-agriculture income annually are also exempt. However, farmers and landowners must file their tax return to disclose their farm income.