Taxability of Agriculture Income as per Income Tax Act, 1961

What is considered as Agricultural Income ?

Section 2 (1A) of the Income Tax Act specifies the circumstances under which sources are discussed by which agricultural income can be generated. The section’s definitions basically point out the following as the sources for agricultural income –

• Revenue generated through rent or lease of a land in India that is used for agricultural purposes.
• Revenue generated through the commercial sale of produce gained from an agricultural land.
• Revenue generated through the renting or leasing of buildings in and around the agricultural land subject to the following conditions.
  • The cultivator or farmer should have occupied the building, either through rent or revenue.
  • The building is used as a residential place, storeroom or outhouse.

The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed.

Is Agricultural Income Taxable ?

Normally, Agricultural Income is exempted from Income Tax and is not included in the total income of the assessee as per section 10(1) of Income Tax Act, 1961. However, State Government can impose taxes on the agricultural income but if the total agricultural income of the assessee does not exceed Rs. 5,000 in a F.Y., the same will not be accounted in the calculation of total income of the assessee.

How to calculate Taxes on Agricultural Income ?

In case the agricultural land is not falling under the scope of the aforementioned section, one would need to do a separate evaluation just for that aspect of tax. If the agricultural income is well within Rs. 5000, the returns need to be filed through ITR 1, else ITR 2 needs to be used wherein there is a separate column for declaring the details of the income.

The tax calculation done here is in accordance with the fact that the income from agricultural sources is falling under Section 2 (1A) of the IT Act.

For all other normal purposes, the tax calculation will involve the following steps:

1. Including the Agricultural Income – Considering B is the base income of the individual and A is the agricultural income, tax first needs to be computed on the amount of B+A. Let’s call this tax as T(B+A).
2. Adding the basic tax slab benefit – Depending upon changes in the Income Tax rules, the basic tax slab might change, but for clarity’s sake, let’s consider that as S. That needs to be added to the agricultural income and another tax is be calculated on the amount. Let’s call this tax as T(S+A).
3. Income Tax liability – This is the tax that is subject to deductions. Thus IT = T(B+A) – T(S+A).