Agriculture is one of the major occupations of Indians and will never go obsolete. But this sector has its own challenges. To tackle the same, the Government of India has come up with a number of schemes like tax exemption.
Agricultural Income Exempted from Income Tax: Agriculture has been one of the most dominant professions in India and is the bread and butter for about 58% of the Indian population. India has also been a stellar participant in the world food trade by way of its exemplary contribution to the food processing industry. India’s food processing industry alone amounts to 32% of the food market in the country. It is, therefore, not surprising to learn that the government has come forward with a variety of schemes and emoluments to leverage the growth in the agricultural industry. Amongst them is the exemption of taxes for agricultural income. In order to understand the nuances of this tax exemption, the topic requires a deep study.
Meaning of Agricultural Income
Agricultural income is defined as the total earnings generated by an individual or entity through agricultural activities conducted on designated agricultural land. Section 2(1A) of the Income Tax Act of 1961 outlines various activities that constitute agricultural income, including:
- Revenue or rent derived from activities carried out on agricultural land within India for agricultural purposes.
- Income from the commercial sale of produce grown on agricultural land.
- Earnings from leasing or renting buildings situated on or near agricultural land provided the tenant is a farmer or cultivator utilizing the building for specific purposes such as warehousing, residential accommodation, or outhouses.
Additionally, the land where the building is located must be assessed for land revenue or subjected to local rates set and collected by local government authorities.
To classify income as agricultural and grasp its meaning better, certain factors must be considered:
- Existence: The income must originate from an existing piece of land.
- Utilization: Rent, revenue, and income generated by tenants or cultivators should result solely from agricultural operations on the land, including marketing expenses incurred to promote agricultural produce.
- Cultivation: Income qualifies as agricultural if derived from land cultivation, encompassing revenue from various produce like fruits, grains, and commercial crops. However, it excludes revenue from activities such as poultry or dairy farming on agricultural land.
- Ownership: Cultivators need not necessarily be landowners but must possess a financial interest in the land as an owner or mortgagee.
Examples of agricultural income include revenue from seed sales, proceeds from the sale of replanted trees, interest on capital received by partners from firms engaged in agricultural operations, earnings from creeper and flower cultivation, rent received for agricultural land, and profits earned by partners from companies or firms involved in agricultural activities.
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Illustrations of Agricultural Income
Some examples of Agricultural Income are:
- Income obtained by selling the seeds
- Income derived by selling replanted trees
- Interest obtained by a partner of a company wherein the interest is got by investing the capital in agricultural activities
- Earnings from cultivating flowers and creepers
- Rent earned for agricultural land
- A partner receives the profits from a firm that deals with agrarian produce.
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However, the following are not within the ambit of agricultural income.
- Earnings from poultry farming
- When gains are obtained from agricultural lands as stock-in-trade
- When an organization pays a portion or dividend from its agricultural income
- Proceeds from dairy farming, bee hives, etc.
- Proceeds obtained from cutting and selling timber trees
- Gains from butter and cheese making
- Receipts obtained from shooting TV serials in a farmhouse.
LLP income tax rates are the same as individual income tax rates, and they vary based on the total income earned during the financial year. Know more: LLP income tax rates
Exemption of Agricultural Income from Income Tax:
Section 10 of the Income Tax Act, 1961 gives the privilege to the agricultural sector by giving an exemption from paying taxes. Having said that, whether the exemption is absolute, is something that deserves to be debated. The Income Tax Act, 1961, in fact, proposes a method of indirect taxation for agricultural income by partially integrating agricultural income with non-agricultural income. More precisely, the Act suggests a higher rate of taxes for non-agricultural income.
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This is applicable to the following classes of agriculturists who have:
- Net agricultural income exceeds ₹5,000/- for the previous financial year
- Income, other than agricultural income is beyond the basic exemption limit
- Income that is above ₹250,000 for individuals below 60 years of age and ₹300,000 for those who are aged between 60-80 years
- Income that is above ₹500,000 for individuals who are beyond 80 years of age.
In essence, the non-agricultural income should be exceeding the stipulated exemption limit as specified in the 80ccc Income tax. It however has to be noted that companies, partnership firms, LLP firms (Limited Liability Partnership) etc are not included in this category.
Steps to Calculate the Agricultural Income
- Step 1: Add the net agricultural income to the non-agricultural income
- Step 2: Add the exempted income as stated in the Income Tax Act, 1961 to the agricultural income in Step 1
- Step 3: Deduct the amount obtained in Step 1 from the amount obtained in Step 2 to arrive at the final tax liability.
The taxpayer, whether an individual or HUF (Hindu Undivided Family) can claim benefit under Section 54 B of the Income Tax Act, 1961, provided the agricultural land in question is sold to acquire another agricultural land. However, the taxpayer has to comply with the provisions stated in the Act to avail this privilege.
Learn more about Types of Income Exempted from Income Tax in India
Which ITR to File for Agricultural Income?
Agricultural earnings should be reported in the Agriculture Income section of ITR 1. However, ITR 1 is applicable solely if agricultural income does not exceed Rs. 5,000. If it surpasses this threshold, filing ITR 2 form becomes necessary.
Tax Benefit Under Section 54B
Section 54B offers capital gains relief to taxpayers who sell agricultural land and reinvest the proceeds in another agricultural land. The eligibility criteria for claiming this benefit include:
- The taxpayer must be an individual or Hindu Undivided Family (HUF).
- The land being transferred must be agricultural, regardless of its classification as a long-term or short-term capital asset.
- The agricultural land must have been used for farming purposes for at least two years preceding the transfer date.
- The taxpayer must purchase another agricultural land within two years from the date of transfer.
- The exemption amount under section 54B is determined as the lower of:
- The capital gains arising from the sale of agricultural land.
- The investment made in the new agricultural land or the amount deposited in the Capital Gains Deposit Account Scheme
Union Budget Highlights for 2023-24
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Economic Growth:
- Increased spending: The budget allocated a total expenditure of Rs 45 lakh crore, with a focus on capital expenditure to boost infrastructure development.
- Fiscal deficit: The fiscal deficit was estimated at 5.9% of GDP, aiming to strike a balance between stimulating growth and fiscal consolidation.
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Social Welfare:
- Tax relief: The budget introduced a new simplified tax regime and provided tax breaks for individuals, especially high-net-worth individuals.
- Empowerment schemes: The budget allocated funds for various schemes aimed at empowering women, supporting farmers, and uplifting underprivileged sections of society.
- Education and skilling: Increased focus on education with budget allocation hikes and skilling initiatives like Pradhan Mantri Kaushal Vikas Yojana 4.0.
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Other Key Highlights:
- Green initiatives: The budget promoted green energy and mobility through various measures.
- Digitalization push: The government emphasized expanding the digital ecosystem for various sectors like education, skill development, and financial inclusion.
- Infrastructure development: Significant increases in allocation for infrastructure projects like transportation and urban development.
Union Budget Highlights 2024-25
With the guiding principle of ‘Sabka Saath, Sabka Vikas, and Sabka Vishwas’ and a comprehensive national strategy termed “Sabka Prayas,” the Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman, presented the Interim Union Budget 2024-25 in Parliament today. Here are the key highlights:
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Social Justice
- Prime Minister’s emphasis on uplifting four major groups: the Poor, Women, Youth, and Farmers.
- Successful assistance to 25 crore individuals out of multidimensional poverty in the last decade.
- Direct Benefit Transfer (DBT) of Rs. 34 lakh crore via PM-Jan Dhan accounts, leading to government savings of Rs. 2.7 lakh crore.
- PM-SVANidhi provided credit assistance to 78 lakh street vendors, with 2.3 lakh receiving credit for the third time.
- PM-JANMAN Yojana for the development of particularly vulnerable tribal groups (PVTG).
- PM-Vishwakarma Yojana offering comprehensive support to artisans and craftspeople in 18 trades.
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Welfare of Farmers
- PM-KISAN SAMMAN Yojana providing financial assistance to 11.8 crore farmers.
- PM Fasal BimaYojana offering crop insurance to 4 crore farmers.
- Electronic National Agriculture Market (e-NAM) integrating 1361 mandis, serving 1.8 crore farmers with a trading volume of Rs. 3 lakh crore.
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Empowering Women
- Thirty crore Mudra Yojana loans disbursed to women entrepreneurs.
- Female enrollment in higher education increased by 28%.
- Over 70% of houses under PM Awas Yojana (Grameen) allotted to women from rural areas.
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PM Awas Yojana (Grameen)
- Despite COVID challenges, the target of three crore houses to be achieved soon.
- An additional two crore houses to be undertaken in the next five years.
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Rooftop Solarization and Free Electricity
- One crore households to receive 300 units of free electricity monthly through rooftop solarization.
- Anticipated annual savings of Rs. 15000 to Rs. 18000 per household.
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Ayushman Bharat
Healthcare coverage under Ayushman Bharat extended to all ASHA workers, Anganwadi Workers, and Helpers.
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Agriculture and Food Processing
- Pradhan Mantri Kisan Sampada Yojana benefiting 38 lakh farmers and generating 10 lakh jobs.
- Pradhan Mantri Formalisation of Micro Food Processing Enterprises Yojana assisting 2.4 lakh SHGs and 60,000 individuals with credit linkages.
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Research and Innovation
- Establishment of a Rs. 1 lakh crore corpus with a fifty-year interest-free loan for long-term financing.
- Launch of a new scheme to strengthen deep-tech technologies for defense purposes and accelerate ‘atmanirbharta.’
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Infrastructure
- 11.1% increase in capital expenditure outlay for infrastructure development and employment generation to Rs. 11,11,111 crore.
- Identification of three major economic railway corridor programs under PM Gati Shakti for logistics efficiency improvement.
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Railways
- Conversion of 40,000 normal rail bogies to Vande Bharat standards.
- Doubling of the number of airports in the country to 149.
- Introduction of 517 new routes catering to 1.3 crore passengers.
- Indian carriers placing orders for over 1000 new aircraft.
How to show Agricultural Income in ITR 1?
When declaring agricultural income in ITR 1, it should be reported in the Agriculture Income column. However, it’s essential to note that ITR 1 is applicable only if the agricultural income is within Rs 5,000. If the income surpasses this threshold, filing ITR-2 becomes necessary.
Wondering about the taxation and treatment of agricultural income? Vakilsearch can lend a hand! Our team of tax experts is ready to offer the guidance you need. Whether it’s clarifying exemption limits, calculating taxes, or reporting agricultural income in your ITR, we have the expertise to assist you. Don’t let the complexities of agricultural income taxation deter you—reach out to us for expert support!
Frequently Asked Questions:-
What is the exemption limit for agricultural income?
The basic exemption limit for agricultural income is: · ₹250,000 for individuals below 60 years of age · ₹300,000 for individuals above 60 years of age
Why is agricultural income exempt from income tax?
From the dawn of civilization, agriculture has been the principal occupation in India. Being a populous country, the country needs to stick on to agriculture to meet its nutritional needs. Despite the change in the economy with a number of new industries springing up, the country is still dependent on agriculture for its commercial and economic growth. On the other hand, the yield in agriculture is quite challenging as it is heavily dependent on erratic climatic conditions. Therefore, the government had to give the necessary. encouragement to this sector to keep it thriving. Various schemes, measures, and policies were put forward to ensure the consistent growth of the agricultural sector. The exemption of taxes for agricultural income is one such scheme devised for the welfare of agriculturists.
Whether agriculture carried out in urban areas is exempted from taxes?
Regardless of whether agriculture is carried out in urban or rural areas, the amount earned by selling the agricultural produce, etc is exempted from paying the Tax.
Are farmers exempted from income tax?
Farmers are generally exempt from income tax on their agricultural income. However, income from non-agricultural activities is taxable as per the Income Tax Act.
Will earnings from raising animals be regarded as agricultural earnings?
Yes, earnings from raising animals are typically considered agricultural income if the animals are raised on agricultural land and the income is derived from agricultural activities.
I grow tea for a living; is this considered agricultural income?
Yes, income from growing tea is considered agricultural income as long as it is grown on agricultural land and the income is derived from agricultural activities related to tea cultivation.
What is the cash limit for agriculture?
There is no specific cash limit for agriculture. However, certain transactions above a specified limit may require reporting under anti-money laundering regulations.
What is the income tax rate for manufacturing tea, coffee, and rubber?
Income tax rates for manufacturing tea, coffee, and rubber are subject to the regular income tax rates applicable to the respective taxpayer, depending on their total taxable income. There are no specific tax rates exclusively for these industries.
Thus, India has taken a giant leap in the field of agriculture with the help of various government schemes. Both individuals and organizations carrying out agricultural activities can avail of this tax exemption.
