Tax on Agricultural Income


As per Section 10 (1) of the Income Tax Act of India, there is no tax on agricultural income. However, certain conditions and classifications can affect the treatment of citizens.

Even if a person can earn tax-free income from agricultural income, they might be liable to taxation when combined with other earnings if altering the primary product of agriculture is involved.

Exploring various types of agricultural income, exemptions, and capital gains on the sale of agricultural land in urban areas can help you understand your best benefits. Read more to find out how useful this information is for any individual.


India doesn’t have a tax on agricultural income. However, if you have an additional income source that isn’t a primary product from agriculture, you are liable to pay taxes.

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Table of Contents:

Agricultural Income Under Income Tax

The income tax regime has a clear structure for agricultural income, defined under Section 10 (1) of the Income Tax Act. According to this rule, no matter how high your agricultural income is, as long as it is purely agricultural income, you do not have to pay a tax for it.

These agricultural activities include:

  1. Income from land cultivation
  2. Rent received from agricultural land
  3. Income from selling unprocessed farm produce
  4. Revenue from agricultural operations

Example of Agricultural Income

Example of Non-Agricultural Income

However, it is still considered for tax purposes when calculating tax liability under the Partial Integration Method.

Agricultural Income under Partial Integration Method

Under the partial integration method, tax calculation is approached using both agricultural and non-agricultural methods. This method prevents tax evasion by ensuring higher tax liability for individuals with substantial agricultural income.

This applies to people who have

  1. Agricultural income exceeding ₹5,000 during the financial year.
  2. Non-agricultural income exceeding the basic exemption limit, which is:
    • ₹2,50,000 for individuals below 60 years.
    • ₹3,00,000 for senior citizens (60-79 years).
    • ₹5,00,000 for super senior citizens (80+ years).

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Agricultural Income Tax Exemption Limit

Under Section 10(1) of the Income Tax Act, agricultural income is fully exempt from tax. However, if your non-agricultural income exceeds ₹2.5 lakh (₹3 lakh for senior citizens and ₹5 lakh for super senior citizens), agricultural income is considered for rate calculation under the partial integration method, affecting tax slabs indirectly.

Types of Agricultural Income Exempt from Tax

Although agricultural incomes don't fall under the tax bracket, they are still considered in calculations. Understanding the types of agricultural income in income tax is essential for determining tax applicability.

These include various types of incomes, like:

  1. Direct agricultural income: earnings made from crop production or livestock marketing, often the primary products.
  2. Rent from agricultural land: Earnings from land rented exclusively for farming.
  3. Income from farm building: If the property is in an agricultural area used for farming purposes.

Farming such as poultry farming, dairy farming, timber businesses, and plantations are partially taxable and are excluded from this exemption.

Agriculture Income Tax Calculation

Even though agricultural income is not directly taxed, it impacts overall tax calculations.

Steps to Calculate Tax on Agricultural Income with Example

Let the agricultural income be ₹10,000 and non-agricultural be ₹3,00,000.

  1. Add agricultural income to total income.

    2. ₹3,00,000 + ₹10,000 = ₹3,10,000.

  2. Determine tax based on the new slab.

    3. Tax is only applicable for income after ₹2,50,000. That is,
    ₹3,10,000 - ₹2,50,000 = ₹60,000.

    Tax applicable for the total amount = ₹60,000 * 5% = ₹3,000.

  3. Deduct tax liability on agricultural income separately.

    4. Tax on ₹10,000 at the same slab (5%) = ₹500

  4. Pay the final tax on non-agricultural income.

    5. Final Tax = ₹3,000 - ₹500 = ₹2,500

Why subtract ₹500?

The tax on ₹10,000 agricultural income is hypothetically calculated at 5% to adjust the slab effect, but it is not actually taxed. This ensures that the higher slab rate does not unfairly increase tax liability on non-agricultural income.

Note: Use an agriculture income tax calculator for accurate estimations. Also, the calculated example provided is for illustrative purposes.

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ITR Filing Guide for Agricultural Income

Individuals who depend on agriculture, like farmers and landowners, must file an ITR (Income Tax Return) if they earn both agricultural and non-agricultural income.

ITR Filing Process for Agricultural Income

  1. Calculate total agricultural income (from crops, rent, farmhouses, etc.).
  2. Add it to non-agricultural income if applicable.
  3. Use the Agriculture Income Tax Calculator to estimate tax liability.
  4. File ITR under the correct category (ITR-1 to ITR-3)

Note:

ITR-1 (Sahaj): If agricultural income is up to ₹5,000 and you have other eligible income sources.

ITR-2: If agricultural income exceeds ₹5,000 or if the Partial Integration Method applies.

ITR-3: If you have business income along with agricultural income.

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Tax Benefit Under Section 54B

Section 54B provides tax relief on capital gains from selling agricultural land.

A tax relief is a reduction in the amount of tax the person has to pay. Under Section 54B, tax relief allows farmers to avoid paying capital gains tax if they reinvest the total received money from agricultural land into new farmland.

Conditions for Section 54B Exemption:

Capital Gain tax on Sale of Agricultural Land in Urban Areas

A capital gain tax is the tax levied on profit earned on selling a capital. This could be land, property, stocks, or bonds. This applies only to the profit.

Difference Between Agricultural & Non-Agricultural Income

There are some key differences between agricultural and non-agricultural income in terms of taxes.

An agricultural source of income can be considered non-agricultural if,

  1. The raw product has been processed beyond basic operations
  2. Agricultural land is used for commercial purposes
  3. Agricultural products are sold after processing
  4. Agricultural land is rented or leased out.
  5. Agricultural land is urban and is sold (urban land is considered a capital asset)

Here are the basic comparisons, based on the most relevant features.

Feature Agricultural Income Non-Agricultural Income
Taxability Exempt from tax Taxable
Examples Crop sale, farmland rent Business, salary, investments
Capital Gains on Land Sale Tax-free (rural land) Taxable
Filing Requirement If combined with other income Mandatory filing

Latest Updates on Agricultural Income Tax Rule

The government periodically reviews agriculture taxation policies, especially concerning taxes on agricultural land and capital gains on the sale of agricultural land in urban areas. Recent discussions suggest potential reforms in tax for farmers with high incomes.

No current proposal to tax agricultural income, but discussions continue on taxing large-scale agribusinesses. Debates have been arising about taxing wealthy farmers to create a fairer tax system. Critics argue that the current exemption allows affluent individuals to avoid taxes, despite benefiting significantly from public infrastructure and services.

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Frequently Asked Questions

Under the Income Tax Act of India, an agricultural income can be farming, land rent, or the sale of unprocessed produce.

No. Agricultural income is exempt from all taxes under Section 10(1). However, it is valid only for pure agricultural income.

It is added to total income to determine the tax slab but is not taxed directly.

Yes. You need to report your agricultural income if it exceeds ₹5,000 per year.

Yes, for tax rate calculation if non-agricultural income exceeds the exemption limit.

Agricultural income remains fully exempt, except for indirect tax rate calculations.

You can declare it in ITR-1 if income ≤ ₹5,000 or ITR-2 if income > ₹5,000.

Yes, it can, if non-agricultural income exceeds the exemption limit.

No, agricultural income itself is not eligible for deductions under the Income Tax Act since it is fully exempt from tax.

Yes, it is best to keep land ownership, sale, and income records safe with you.

If the land is in an urban area, it is taxable, as urban agricultural lands are considered capital assets and can fall under the capital income tax.

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