Tax treatment of Agriculture Income in India

What is the meaning of agriculture income in India?

As per Income Tax Act 1961 section2 (1A) agriculture income means:

1. Any rent or revenue derived from a land
   • Which is situated in India and
   • Used for agricultural purposes.

Note:

• • Rent maybe received in kind or cash.
  • The assessee maybe owner or tenant of such land.

2. Any income derived from such land by agricultural operations.
3. Any income derived from such land by the cultivator or receiver of rent in kind by processing the agricultural produce so as to render it fit for sale in market.
4. Any income derived from such land on sale made by the cultivator or receiver of rent in kind of agricultural produce received without carrying any process, other than the process required to render it fit for sale in market.
5. Any income derived from a building subject to fulfillment of following conditions:
   • Occupation: Building must be occupied by cultivator or receiver of rent in kind.
   • Situation of building: The building should be in or in immediate vicinity of Agricultural land.
   • Use of building: It must be used as dwelling house or store house or out-house.
   • Land is either situated in
     • Rural area or
     • Urban area and assessed to land revenue/ local rates.

Note: If such land or building is used for non-agricultural purpose then any income derived from such land or building shall not be treated as agriculture income.

Legal position of tax on agriculture

• In the seventh schedule, Entry 82 in the Union List mentions taxes other than agricultural income, while Entry 46 in the State List mentions taxes on agricultural income.
• Therefore, it is in the state list.
• Section 2(1A) of the Income Tax Act defines agricultural income as rent/revenue from land, income derived from this land through agriculture and income derived from buildings on that land.
• Section 10(1) of the Income Tax Act excludes agricultural income from a computation of total income.

Treatment of partly agricultural & partly non-agricultural income:

Tax treatment of agricultural income in India

Agricultural income is not included in total income. However in following cases agricultural in Agricultural income is added to Non-Agricultural Income for purpose of tax computation:

• Applicability: the method of aggregation is applied to Individual, HUF, and AOP/BOI only.
• Minimum agricultural income: it is applicable when agricultural income exceeds Rs. 5000
• Minimum total income: the total income must exceed the maximum amount not chargeable to tax i.e. 250000, 300000, and 500000.

Procedure applicable to computation of tax

Tax on sale of agriculture land in India

An agricultural land in rural India does not form part of the definition of a capital asset and hence, there will be no capital gain on the sale of such land.

What is Section 54B of the Income Tax Act, 1961?

This section provides a relief to the taxpayers who sell their agricultural land and use the sale proceeds to acquire another agricultural land.

The following conditions have to be fulfilled by taxpayer to avail the exemption in this section:

• This relief can be availed only by an individual or a HUF.
• The agricultural land should be used by the individual or his parents for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred.
• The taxpayer should purchase another agricultural land within two years from the date of selling the old land.

Income tax return applicable for agriculture income in India

If the aggregate agricultural income of the assessee is up to Rs. 5000/- disclose the agricultural income in the income tax return (ITR)-1

But if the agricultural income exceeds Rs. 5000 then form ITR-2 applies.