What is Agriculture Income?

Introduction

The Indian government has defined various sections to categorise income and earnings for better transparency while calculating the total taxable income and for the citizens to file taxes. One such category is agriculture income.

Understanding “what is agriculture income” is critical, as it is taxed differently under the two tax regimes. Agriculture income is the total revenue an individual or entity earns from sources, including land farming, commercial produce from horticulture land and buildings on identified agricultural land.

Under the Income Tax Act of 1961, section 2(1A) defines the agricultural revenue of an individual or entity. 
 

What Is Agriculture Income?

To define agriculture income, it is the total revenue generated by an individual or entity by executing agricultural activities on identified agricultural land. Section 2(1A) of the Income Tax Act of 1961 defines agriculture income under the following activities.

●    Revenue or rent generated through activities executed on agricultural land situated in India for agricultural purposes

●    Income or revenue generated by the commercial sale of produce grown on agricultural land

●    Income or revenue generated by leasing or renting buildings on or around agricultural land (the tenant should be a farmer or cultivator and use the building for a warehouse/storeroom, residential space or outhouse)

Furthermore, the land on which the building is situated should be assessed for land revenue or through a local rate set and collected by local government officers. 

For an income to be categorised as agricultural income and for a better understanding of the agricultural income meaning, consider the following factors.

●    Existence: The income earned should come from an existing piece of land. 

●    Utilisation: The rent or revenue and the income generated by the tenant or the cultivator from the agricultural land should be through agricultural operations only on the piece of land. The income also includes the marketing expenses done to promote the agricultural produce. 

●    Cultivation: The income will be considered agricultural income if the income is generated by way of the cultivation of land. Such an income includes revenue from all land produce such as fruits, pulses, grains, commercial crops etc. However, the income does not include revenue from activities such as poultry farming, dairy farming etc., on the agricultural land. 

●    Optional Ownership: The cultivators do not necessarily have to be the owner of the land through which they generate the agricultural income. However, the individual must possess a monetary interest in the land as an owner or a mortgagee. 

Here are some examples of agricultural income: 

●    Income from the sale of seeds. 
●    Revenue generated from the sale of replanted trees. 
●    Interest on the capital amount a partner receives from a company or firm engaged in agricultural operations. 
●    Income from growing creepers and flowers. 
●    Rent received by an individual or entity for agricultural land. 
●    Profits received by a partner from a company or a firm engaged in agricultural produce or activities. 
 

Types of Agricultural Income

The Indian government has classified agricultural income into three categories. 

●    Income from agricultural land: This includes income earned from cultivating crops, fruits, vegetables, and other agricultural products. It also incorporates income from selling livestock, dairy products, and poultry.

●    Income from agricultural business: This includes income earned from agricultural processing and manufacturing activities such as sugar, textiles, jute, and other agricultural products.

●    Income from agricultural rent: This includes income earned by the landowner from renting out the land to farmers for cultivation purposes. The owner can receive the rent income either in cash or in kind. 
 

Agricultural Income in Income Tax

The Indian government, with the Income Tax Department, has exempted agriculture income by defining agriculture income tax under section 10(1) of the Income Tax Act of 1961. The exemption implies that the government wants Indian citizens to take on agricultural activities without being liable to pay income tax on the earned income.

However, the state government levies agriculture income tax on agriculture income using a method known as partial integration of agricultural income with non-agricultural income when the below conditions are met.

●    The net agriculture income is above Rs 5,000 in the previous financial year. 

●    Total income after deducting the agricultural income is higher than the exemption limit of Rs 2,50,000 for individuals below 60 years, Rs 3,00,000 for senior citizens and Rs 5,00,000 for super senior citizens. 
 

Taxation of Agricultural Income

Although the Indian government has exempted agriculture income from income tax, the Income Tax Act of 1961 defines a method to indirectly tax the income earned from agriculture. It partially integrates agricultural and non-agricultural income with the above-mentioned conditions.

If an individual and entity fulfil the above criteria, the agriculture income tax is calculated through the below three-step process: 

1.    Determining tax on non-agricultural income + net agricultural income. 

2.    Calculating tax on net agricultural income + maximum set exemption limit as per applicable tax slab. 

3.    Calculating the final tax amount by determining the difference between the amounts of steps 1 and step 2. This step provides the following information: 

●    Deduction of a tax rebate, if available. 
●    Addition of a surcharge, if applicable. 
●    Addition of the Health and Education Cess. 

Section 54B of the Income Tax Act of 1961 provides tax relief to an entity or individual if they sell their owned agricultural land and use the amount they receive after selling to acquire another piece of land.

However, you must fulfil the following criteria to claim the benefit under section 54B.

●    The benefit-claiming entity can only be an individual or a Hindu Undivided Family (HUF). 

●    The individual or their parents should have used the agricultural land for at least two years before the date of selling. For HUFs, the land should have been used by a member. 

●    The individual or the HUF must purchase another agricultural land within two years of selling the last one. 
 

Representation of Agriculture Income In Income Tax Returns

According to the Income Tax Act of 1961, the taxable is legally liable to represent the agricultural revenue in ITR 1 under the Agricultural Income column. However, the taxpayer can only use ITR 1 if the agriculture income is lower than Rs 5,000. If the income exceeds Rs 5,000, the taxpayer must file ITR 2.