Agricultural Income- All you need to know
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Agriculture is one of India’s main sources of income, where agricultural income accounts for around 20% of GDP.
As agricultural Income may have an income source for any individual, it is very important to understand its Tax implication, i.e., its tax provisions as stated in Income Tax Act, 1961.
The provision of Agricultural Income is stated in Section 10 (1), which provides that agricultural income is not to be included in the total income of the assessee. It means that Agricultural Income will not be taxed under Income Tax.
For your understanding, Agricultural Income will not be included in total income because, in our constitution, the central government is not empowered to levy any taxes on agricultural income, and Income Tax is levied at the central level, therefore, agricultural income is kept out of its preview.
To understand the taxability of Agricultural Income, it is very important to first understand what does Agriculture Income means?
The definition of agricultural income is defined under Section 2 (1A), which is very wide in scope. It only covers cultivators but also includes landholders who might have rented out the land.
Agricultural income may arise in the following three ways:
- It may be in form of rental income derived from land situated in India and such land should be used for agricultural purpose (It mean if the agricultural income derived from land situated outside India, then it will not be covered under the definition of agricultural income, hence liable to income tax).
- Income derived from agricultural activity, like sale of agricultural produce or any process ordinarily employed by cultivator or receiver of any rent.
- Agricultural Income may be derived from any farm building required from the agricultural operation.
Interesting fact- The term agriculture is not defined in Income Tax Act.
Agriculture not only includes basic operation and also include subsequent operation. Here, subsequent operation means any operation which is to be performed after agricultural produce and this subsequent operation would be agricultural operations only when taken in conjunction with and as a continuation of the basic operation.
Important Tip:
The process ordinarily employed to render the produce fit to be taken to the market, and any income from such operations would be agricultural income. This situation covers the cases, where it is sometimes necessary to produce some type of process on agricultural produce to make agricultural produce a saleable commodity.
Whether income from nursery constitutes agricultural income?
This situation is quite confusing as in some court rulings nursery income would constitute agricultural income only if the nursery is maintained to carry out the basic operation on land. To give more clarity on this topic, an explanation 3 to section 2 (1A) provides that the income derived from the saplings or seedlings grown in a nursery would be deemed to be agricultural income, whether or not the basic operations were carried out on land.
Income from Farm Building– Income from the farm building which is owned and occupied by the receiver of the rent or revenue of any such land or occupied by the cultivator or the receiver of the rent in kind, of any land with the respect to which, or the produce of which is carried on, would be treated as agricultural income.
To summarize: Agricultural income would be exempt from Income tax under Section 10 (1).
Watch our video posted on YouTube on this topic: https://youtu.be/Sc3Nd0v4xpo
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