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Income Tax on Agricultural Income & Sale of Agricultural Land

September 13, 2018

Income Tax on Agricultural Income
Income Tax Capital Gain Sale of Agricultural Land, Calculation on Agricultural Income

CA Ankit Gulgulia (Jain)

Mr. Mohit Jain

As per Section 10(1) “Incomes not included in total income” of the Income Tax Act, 1961, in computing the total income of a previous year of any person, any income falling within Agricultural Income shall not be included.

In other words, income earned, as mentioned in section 2(1A) of the income tax act, 1961, is not taxable. The power to make laws with respect to taxes on agricultural income is with the state legislature as per the Constitution of India. Hence agricultural income is exempt from Central Taxation.

Meaning of Agricultural Income (Section 2(1A))

Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as an income under the following three sources:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

The assessee will not be liable to pay tax on the rent or revenue arising from agricultural land subject to the conditions:

(a) The land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government

(b) Where the land is not so assessed to land revenue or subject to a local rate, the land should not be situated within the jurisdiction of a municipality[1] or a cantonment board, and which has a population of more than ten thousand[2] ; or it should not be situated:

1) more than two kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or

2) not being more than six kms. from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or

3) not being more than eight kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.

Further, a direct nexus between the agricultural land and the receipt of income by way of rent or revenue is essential. (For instance, a landlord could receive revenue from a tenant.)

(a) Any income derived from such land by-

(i) Agriculture; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ;

(b) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on;

The building must be used by the assessee as a dwelling house or store-house or an out-building, in connection with the land.

In addition to the above, income derived from saplings or seedlings grown in nursery is also considered as agricultural income.

Calculation & Taxability of Agricultural Income

Agricultural income is considered for the computation of income tax liability, if;

Net Agricultural income exceeds Rs. 5,000/- for previous year, and
Total income, excluding net Agricultural income, exceeds the basic exemption limit.

Note

If aggregate agricultural income of assessee is less than or equal to Rs. 5000/-	Entire Income will Exempt, form ITR-1 is filled for disclosure.
If aggregate agricultural income of assessee is more than Rs. 5000/-	Form ITR-2 will apply

Once the aforementioned conditions are satisfied then we shall compute the Tax liability in the following manner:

Step-1: Include the Agricultural income while computing your income Tax liability.

Example – An Individual Assessee has a Total income of INR 3,00,000/- (excluding Agricultural income) and a Net Agricultural income of INR 100,000/-. Then, as per this step, Tax shall be computed on INR 3,00,000/- + INR 1,00,000/- = INR 4,00,000/-. Thus, income Tax amount as per this step shall be INR 15,000/- for an individual who is below the age of 60 Years during the P.Y. 2014-15.

Step-2: Add the applicable basic tax slab benefit, to the Net Agricultural income.

Thus, as per our example in step-1 we shall add INR 2,50,000/- to INR 1,00,000/- as the applicable Tax slab benefit available to an individual below 60 Years of age is INR 2,50,000/-. Now we will compute income Tax on INR 3,50,000/- (Tax slab benefit 2,50,000 + Net Agricultural income 1,00,000). The amount of Tax shall be INR 10,000/-.

Step-3: Subtract the Tax computed in Second step from the Tax computed in First step = INR 15,000/-.

This is the income Tax liability subject to deductions, Education Cess etc., as applicable.

This process of computation is, however, followed only if the assessee’s non-agricultural income is in excess of the basic exemption slab.

Other Important Points

Agricultural income is considered for rate purpose while computing the tax liability for Individual/HUF/AOP/BOI/Artificial Judicial Person.

Losses from agricultural operations could be carried forward and set off with agricultural income for the next eight assessment years.

Agriculture income is computed in a manner similar to business income.

Exceptions for Agricultural Income:

If a person sells processed produce without carrying out any agricultural or processing operations, the income would not be regarded as agricultural income.

Likewise, in cases where the produce is subjected to substantial processing which changes the very nature of the product (for instance, canning of fruits), the entire operation is not considered as an agricultural operation. The profit from the sale of such processed products will have to be apportioned between agricultural income and business income.

Income from trees that have been cut and sold as timber is not considered as an agricultural income since there is no active involvement in operations like cultivation and soil treatment.

Income Tax on sale of agricultural land:

After some favorable judgments of various High Courts on the issue, via a retrospective amendment that took effect from April 1, 1970, land qualifies to be an agricultural land if the prescribed conditions are satisfied. An agricultural land does not form part of the definition of a capital asset and hence, there will be no capital gains on the sale of such land.

Before 1970, profit on the sale or transfer of all agricultural land was considered rent or revenue derived from the land. Such profit was, therefore, tax-exempt as agricultural income.

Any other land not forming part of the above will be a capital asset and sale of the same shall attract tax on capital gains subject to Section 54B, which is explained below.

Section 54B: Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases

Section 54B gives relief to a taxpayer who sells his agricultural land and acquires another agricultural land from the sale proceeds.

Conditions to be satisfied to claim the benefit of this Section:

The assessee must be an individual or a HUF.

The agricultural land should have been used for agricultural purposes. It may be a long term asset or a short term asset.

It must have been used either by the assessee or his parents for agricultural purposes in at least two years immediately preeceding the date on which the transfer of land took place.

The assessee should have purchased another land, which is being used for agricultural purposes, within a period of two years from the date of sale.

Note: In case of compulsory acquisition, the period of acquisition of new agricultural land will be determined from the date of receipt of compensation. However, as per Section 10 (37), no capital gain would be chargeable to tax in case of an individual or HUF if agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and received on or after 01-04-2004.

The whole amount of capital gain must be utilised in the purchase of the new agricultural land. If not, the difference between the amount of capital gain and the new asset will be chargeable as capital gains and the tax will be computed accordingly.

The new asset purchased should not be sold within a period of three years from the date of acquisition.

If sold, the cost of the new asset will be reduced by the amount of capital gain (claimed as exemption under Section 54B) for the purpose of computing tax on capital gains.

Where the amount of capital gain is not utilised by the assessee for the purchase of the new asset before the due date of furnishing his return of income, he may deposit it in the Capital Gains Account Scheme (CGAS) of any specified bank.

The return of income of the assessee should be accompanied by the proof of such deposit.

In such a case, the cost of the new asset shall be deemed to be the amount already utilised by the assessee for the purchase of the new asset together with the amount deposited in the CGAS.

If the deposited amount is not utilised for the purchase of the new asset within the specified period, then the unutilised amount shall be taxed as income in the year in which the period of two years from the date of sale of the original asset expires.

TDS on Sales of Agricultural Land

As per Section 194 (IA) “Payment on transfer of certain immovable property” of the Income Tax Act, 1961, any sum paid by way of consideration of Rs. 50 Lakhs or more for transfer of immovable property (Other than agricultural land) is the payment in respect of which tax is deducted.

Hence, as per the interpretation of the section 194(IA), there is no TDS to be deducted on sale of Agricultural Land.

Tax Saving Tip:

Form a company or a partnership firm for the sole purpose carrying on your agricultural operations. As indirect effect of agricultural income is not applicable in a company or a firm due to non existence of any slab rate, the complete amount would become exempt from taxation.

Frequently Asked Questions:

Whether Income from film shooting on agricultural land is chargeable is exempt from tax?

This point was considered by the Madras High Court in B. Nagi Reddi v CIT ((2002) 125 Taxman 20). In this case, the assessee had shown certain income from film-shooting in his premises, which was known as Vijaya Gardens, and he used to recover charges for the same. The assessee claimed that those charges amounted to agricultural income as the said premises were used for agricultural activities also. The assessing authority, however, treated it as business income as the income had no direct link with the agricultural operations.

Whether Income from Plantation companies is exempt from tax?

Many plantation companies have launched schemes that offer tax-free agricultural income. These schemes are of various types: while some give investors leasehold rights to the land, some give rights to trees at a certain level above the ground, even as others offer rent. If the scheme gives rise to ownership or leasehold interest in the land, then the income is considered to be rent or revenue in the hands of the investor. In the absence of ownership or leasehold rights, income from plantation companies is either considered interest or non-agricultural income chargeable to tax

Whether income from farm house is agricultural income or not?

As per section 2(1A)(iii) of Income Tax Act, 1961, we can consider income attributable to a farmhouse as an agricultural income, subject to the conditions explained. Normally, the annual value of a building is taxable as ‘income from house property’. However, in the case of a farm house, the annual value would be deemed agricultural income and thus, be exempt from tax.

What if agriculture operation is carried on urban land?

If agricultural operations are carried out on land, either urban or rural, the income derived from sale of such agricultural produce shall be treated as agricultural income and will be exempt from tax.

Whether dairy farming is an agricultural income?

As per section 2(1A) of the Income tax act, 1961, the existence of land, Usage of land for agricultural operations, Cultivation of Land, are necessary for agricultural income. Land is exists, but dairy farming doesn’t fulfill the other conditions.

Hence, Dairy farming is not an agricultural income.

I have a business income of Rs 7,00,000 and agricultural income of Rs 8,00,000. These figures relate to the Assessment year 2014-15. How will my tax liability be computed?

Agricultural income is exempt under Section 10(1) of the Act so long as the income is derived from agricultural land situated in India. This income is, however, included merely for rate purposes and rebate is allowed on the same in accordance with the Finance Act. The inclusion of Agricultural income for rate purpose is only required if total income of an individual exceeds Rs. 2,50,000/- (assessee being aged less than 60 years of age).

*Particulars*	*Amount in Rs.*
Business Income	7,00,000/-
Agricultural Income	8,00,000/-
Income Including Agricultural Income	15,00,000/-
Tax on 15,00,000/-	2,75,000/-
Less: Rebate on Agricultural Income
(Tax on Rs. 8,00,000 + Rs. 2,50,000 being basic exemption)	1,40,000/-
Net Tax Payable	1,35,000/-
Add: Ed. Cess & Sec. & Higher Ed. Cess @ 3%	4050/-
Total tax Payable	1,39,050/-

If an assessee sells the fruits of the trees planted by him around his home, will the income so earned be agricultural income?

The trees planted by him should be on a land which can be classified as an agricultural land by fulfilling the conditions mentioned earlier in this article. If the land is agricultural, then the income earned by selling of fruits can be treated as agricultural income.

Whether income earned from export of agricultural produce is exempt from income tax?

The conditions for considering the income as agricultural in nature have to be satisfied if the agricultural produce has to be exempt from income tax. Middlemen dealing in trade of agricultural produce are generally not entitled to exemption due to lack of satisfaction of the conditions.

I have an income of Rs.1,45,000 from my business and an agricultural income of Rs. 8,40,000. Do I need to file the return of income?

The process of computation of tax liability is followed only if the assessee’s non-agricultural income is in excess of the basic exemption slab. In this case, the income from business of the assessee is lower than the basic exemption limit. However, the returns have to be filed with regards to the disclosure of agricultural income.