AGRICULTURAL INCOME TAXATION IN INDIA

A Comprehensive Overview

Agriculture remains the backbone of India's economy, serving as the primary source of livelihood for a significant portion of the rural population. Beyond sustaining millions of families, it also fulfills the nation’s essential food requirements. To support this critical sector, the government has implemented various policies, schemes, and incentives, including tax exemptions on agricultural income.

While the tax exemption on agricultural income is a well-known aspect, the broader framework of agricultural income taxation involves several nuances. This article provides a detailed exploration of the legal provisions governing agricultural income tax in India.

 

Defining Agricultural Income

Under the Income-tax Act, agricultural income is classified into three main categories:

1. Rent or Revenue from Agricultural Land

Rent refers to the payment received for granting the right to use agricultural land. This also includes other sources of income related to the land, such as fees for lease renewals. However, income generated from the sale of agricultural land does not fall within the definition of agricultural income.

2. Income from Agricultural Land

Although the Act does not explicitly define "agriculture," the Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy identified two types of operations:

• Basic Operations: These involve direct activities on the land, such as cultivation, tilling, sowing, and planting.
• Subsequent Operations: These include processes like preservation, enhancement, and making the produce market-ready.

Even saplings or seedlings from nurseries qualify as agricultural income, even if they are grown without direct land operations. Additionally, income from processes that make agricultural produce marketable (e.g., processing tea, coffee, or rubber) is partly considered agricultural income, with prescribed rules distinguishing the agricultural and non-agricultural components.

3. Income from Farm Buildings

For income from farm buildings to qualify as agricultural income, two conditions must be met:

• The building must be located near agricultural land.
• The land must either be assessed for revenue by the government or situated outside a specific distance from municipalities, depending on population thresholds.

 

Tax Implications and Partial Integration

While agricultural income is generally exempt from income tax, the system of partial integration ensures indirect taxation of non-agricultural income at higher rates. This applies to individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and artificial juridical persons if:

• Net agricultural income exceeds ₹5,000.
• Non-agricultural income surpasses the basic exemption limit under the Income-tax Act.

 

ITR Filing and Tax Benefits

• Agricultural income up to ₹5,000 can be reported using ITR-1 (Sahaj). For income exceeding ₹5,000, taxpayers must use ITR-2.
• Section 54B provides relief on capital gains arising from the sale of agricultural land if the proceeds are used to acquire new agricultural land within two years. Eligible taxpayers include individuals and HUFs, provided the land was used for agricultural purposes prior to the sale.

 

Union Budget Highlights

The Union Budget 2023-24 earmarked significant funds for the Ministry of Agriculture and Farmers Welfare. Notably, it announced the establishment of an Agriculture Accelerator Fund to support innovation and rural startups, aimed at driving growth and sustainability in the sector.

 

Conclusion

Agricultural income taxation in India reflects the government’s commitment to supporting the agriculture sector while balancing revenue considerations. Although agricultural income enjoys a tax-exempt status, related provisions such as partial integration and specific tax benefits ensure fairness and compliance. Understanding these nuances is essential for individuals and entities engaged in agricultural activities to fully leverage available exemptions and incentives.