Exemptions on Agricultural Income in India

Agriculture has been the backbone of India’s economy for centuries, contributing significantly to employment and GDP. The Indian government provides several exemptions on agricultural income to support farmers and promote agricultural activities. Under the Income Tax Act, 1961, agricultural income is exempt from taxation under Section 10(1), provided certain conditions are met.

In this article, we will discuss what qualifies as agricultural income, tax exemptions, and how agricultural income is treated under the Indian tax system.

What is Agricultural Income?

According to Section 2(1A) of the Income Tax Act, 1961, agricultural income includes the following:

Income from Agricultural Land: Any income earned from land situated in India and used for agricultural purposes. This includes cultivating crops, growing fruits, and planting trees.

Income from Processing Agricultural Produce: If the produce is processed to make it marketable and the processing takes place on agricultural land, the income remains exempt.

Income from Farm Buildings: Rent or revenue from buildings situated on or near agricultural land and used for agricultural purposes.

Income from the Sale of Agricultural Produce: Earnings from selling crops, fruits, or vegetables grown on agricultural land.

Examples of Agricultural Income

• Income earned from the sale of wheat, rice, fruits, and vegetables.
• Rent received from farmland given for cultivation.
• Earnings from processing sugarcane into jaggery on the farmland itself.
• Revenue from dairy farming if fodder for cattle is grown on agricultural land.

Non-Agricultural Income (Taxable Income)

• Income from poultry farming.
• Income from fisheries, bee-keeping, or floriculture.
• Income from leasing out land for non-agricultural purposes.
• Earnings from processed agricultural goods (if processed outside farmland).

Tax Exemption on Agricultural Income in India

Full Exemption Under Section 10(1)

Under Section 10(1) of the Income Tax Act, any income derived from agricultural land in India is fully exempt from tax. No tax is levied on agricultural earnings, regardless of the amount earned.

2. Partial Taxation Under the Aggregate Method

Though agricultural income itself is exempt, if an individual has non-agricultural income exceeding ₹2.5 lakh, the tax liability is calculated using the aggregate method. The process involves:

• Adding agricultural income to the total taxable income.
• Calculating tax on the combined income at applicable slabs.
• Subtracting tax on agricultural income from the computed tax.

This method ensures that taxpayers in higher income brackets do not use agricultural income as a loophole for tax evasion.

Eligibility for Agricultural Income Exemption

To qualify for agricultural income exemption, the following conditions must be met:

• The land must be in India.
• The land must be used for agricultural purposes.
• If there is processing, it should be done on the same land.
• Any rental income should be from farm buildings used for agriculture.

1. Is agricultural income completely tax-free?

Yes, agricultural income is fully exempt from tax under Section 10(1). However, if non-agricultural income exceeds ₹2.5 lakh, tax is calculated using the aggregate method.

2. Do I need to report agricultural income in ITR?

Yes, even though it is tax-exempt, agricultural income must be declared in the income tax return (ITR).

3. Is agricultural income from leased land tax-free?

Yes, income from farming on leased land is also exempt, provided the land is used solely for agricultural purposes.

4. Can corporate entities claim agricultural income exemption?

No, only individuals and Hindu Undivided Families (HUFs) can claim tax-free agricultural income. Companies are not eligible.

5. Are fisheries and dairy farming included in agricultural income?

No, income from fisheries, dairy farming, poultry, and bee-keeping is not considered agricultural income.