According to the provisions of the Income Tax Act, any income earned from any of the three following three sources are considered as agricultural income;
(a) Any rent received from land normally used for agricultural purpose;
(b) Any income earned from a land by agricultural operations such as processing of agricultural produce, etc. received as rent in kind for sending it to for use in the market, or sale of such produce;
(c) Income from a farm house provided that building is situated on or very close to the land and is used as a dwelling house, store house etc.
Essentials of agricultural income:
1. There must be a land;
2. There must be an operation amounting to cultivation.
3. The land should be used for cultivation.
Whether ownership is a necessary factor?
For any agricultural operation it is not necessary that the person doing it has be the owner of the agricultural land. He could be a tenant or a sub-tenant in respect of the said land. Any farmer is included in the category.
Examples of agricultural income:
The following amount to agricultural income:
(a) Income from sale of planted trees; (b) Any rent received for agricultural land; (c) Income from growing flowers and plants; (d) Income earned out of sale of seeds.
Examples of non – agricultural income:
(a) Income from poultry; (b) Income from honey bee culture; (c) Income from sale of trees which were not planted; (d) Income from dairy;
Taxability of such type of income:
In India agriculture income was exempted from tax under the Income Tax Act. This means that income earned from the above mentioned sources were not taxed.
The Finance Act, 1973, included agricultural income within the ambit of non-agricultural income of non-corporate assessees who are liable to pay tax at some particular slab rates.
Agriculture income is computed in the like manner as business income. Losses from agricultural operations could be carried forward and set off with that of the following eight financial years.
Calculation of income tax:
Income tax is first of all calculated on the net agricultural income along with the total income of an assessee from non-agricultural sources. Thereafter tax is calculated on the basic exemption slab increased by the net agricultural income of the assessee. The assessee has to pay the difference between the two.
Reason behind the exemption:
The reason for exemption of agriculture income from paying taxes is that the Constitution has given total power to the State Legislature in connection with making laws relating to taxes on agricultural income.
Points to be kept in mind:
Though agricultural income is exempted from tax, people have to be careful at the time of dealing with such income. They have to see they have added their agricultural income with their total income to avoid penalties for concealing the income. As a result the rate of tax on non-agricultural income is more for such assessees. Assessees have to maintain records to provide the tax department the proof of ownership of agricultural land and proof of earning agricultural income.
Cases amounting to no tax liability:
Sometimes many tenants fail and / or neglect to pay rent or revenue payments; as such they are compelled to pay arrears. If the landlord imposes any interest on them, the income is not agricultural income, but is treated as income by way of interest and is liable to be taxed.
If anybody sells processed produce without any actual agricultural or processing operation, the income from the said business is not considered to be agricultural income. Similarly where the produce is processed so that the character of the product is changed to a great extent, the total operations are not considered to be agricultural operations. The profit from the sale of such business is divided between agricultural income and business income.
Tips for saving tax on agricultural income:
An assessee can form a company or a partnership firm with the object to carry on agricultural operation. The indirect effect of agricultural income does not apply to a company or a firm. The income from the said business would be exempt from income tax.
