Exemption from Income Tax: Agriculture

This article has been written by Navneet Chandra and gives basic information about whether to pay the taxes for there agricultural income or not.

Agricultural Income under Income Tax

Agriculture as we know is the basic yet the most beneficial practice in India. Here farming is considered as the most common occupation, especially in the rural area. And apart from producing the basic needs of a human being, some manage make profit out of it. This is where the question of Income tax comes in. Basically, the taxation is exempted from agriculture income according to Section 10(1) of Income tax Act, 1961. However, there are a few conditions that leads to payment of taxes, which will be discussed later.

What is Agriculture and Agricultural Income?

The meaning of Agriculture is nowhere covered in the Income tax Act 1961, but was interpreted by Supreme Court in the case of CIT vs Raja Benoy Kumar Sahas Roy, where the agriculture was classified into two processes.

Basic operations (cultivation, sowing of seeds, planting etc)
Subsequent operations (weeding, cutting, harvesting etc)

The term agricultural income can basically be understood as the revenue or profits gained from an agricultural piece of land by doing the following activities:

Profits earned from a land which is being used for agricultural activities in the form of rent or lease.
Profits earned by selling the productions of an agricultural land.
Profits earned in the form of rent or lease from the buildings built on or near the agricultural land. However, there are a few conditions-
1. The agriculturalist must have engaged the building.
1. The building is being occupied as a place of residence or a storage.

Agricultural financial gain is totally exempt from tax by central government given that the individual’s i) total agricultural financial gain is a smaller amount than Rs. 5,000 and ii) the full financial gain, excluding agricultural financial gain, is a smaller amount than basic exemption limit. However State may indirectly collect taxes out of it.

Why and how is income tax generated out of agriculture land?

Income tax on the other hand is an important mechanism through which the government collect funds from its citizens for collective good as it is not possible for individuals to work separately for public welfare. The payment of tax helps the government in development of nation, improvement of infrastructure, upliftment of the society and also the welfare practices for the country, Public health, law enforcement, Public transportation, public education, Scientific research and defence expenditure. And there are multiple forms for taxation through which the collection is done, such as- Direct taxes (eg- Income tax), Indirect taxes (eg- GST), Property taxes, Entertainment taxes, Transfer taxes, Road taxes and toll taxes.

Income tax is imposed on all the people making any type of income except the incomes mentioned under Section 10 of above-mentioned Act.

Agricultural land under Income tax is primarily exempted of taxation according to the Income tax Act,1961 as we discussed earlier. However, there are other condition we can say mechanism from which income tax can be collected in this situation. This mechanism can be known as the partial integration of agricultural income with non-agricultural income. It heads at taxing the non-agricultural income at higher rates of tax

Partial Integration Method

If someone earns each agricultural and non-agricultural financial gain, then the rateable financial gain is calculated as per the partial integration methodology. The steps for computing rateable financial gain as per partial integration methodology is as follows:

Compute taxation on the idea of the entire of agricultural financial gain + non-agricultural financial gain with no education cess.
1. Compute taxation on the idea total of agricultural financial gain additionally to exemption limit (Rs.2.5 lakhs currently) while not education cess.
1. Deduct tax at step (2) from tax at step (1) and apply education cess of three.

The above-mentioned mechanism is applicable only when a below-mentioned conditions are met:

Individuals, HUFs, AOPs, BOIs and artificial juridical persons have to compulsorily calculate their taxable income using this method. Thus Company, firm/LLP, co-operative society and local authority are excluded from using this method.
Net agricultural income is greater than Rs. 5,000 during the year; and
Non-agricultural income is:
- Greater than Rs. 2,50,000 for individuals below 60 years of age and all other applicable persons.
- Greater than Rs. 3,00,000 for individuals between 60 – 80 years of age.
- Greater than Rs. 5,00,000 for individuals above 80 years of age.

Conclusion

Agriculture income is outlined under Section 2 (1A) and is exempt beneath the Indian tax Act. this suggests that income earned from agricultural operations isn’t taxed. the explanation for the exemption of agriculture financial gain from Central Taxation is that the Constitution offers exclusive power to form laws with relation to taxes on agricultural financial gain to the State assembly. While computing tax on non-agricultural income, agricultural income is additionally taken into thought.

Although agricultural income is totally exempt from tax, the Finance Act, 1973, introduced a theme whereby agricultural financial gain is enclosed with non-agricultural financial gain within the case of non-corporate assesses who are entitled to pay tax at specific block rates.

A method has been listed below to levy tax on agricultural financial gain in associate indirect way. this idea is understood as partial integration of taxes. it’s applicable to people, HUF, unregistered corporations, AOP, BOI and artificial persons. 2 conditions which require to glad for partial integration are:

The net agricultural financial gain must exceed Rs. 5,000 per annum, and
Non-agricultural income must exceed the maximum quantity not indictable to tax.

It is true that it’s untaxed however the liberty arises neither by virtue of a rise within the tax threshold, that remains place at Rs 50,000, nor by exemptions offered by Sec. 10. It attracts rebate beneath the freshly inserted Sec. 88D. Clearly, despite agricultural financial gain being untaxed, assesses ought to be further careful whereas coping with such financial gain. they have to ensure that they mixture agricultural financial gain with their total financial gain to avoid interest payments and potential penalties for concealment of financial gain. Assesses should additionally maintain credible records to supply the tax authorities with proof of possession of agricultural land and proof of earning agricultural income.