Agricultural income is one of the most important sources of income for a significant portion of India’s population. According to the Income Tax Act, agricultural income is defined as income derived from any land situated in India which is used for agricultural purposes. This includes income from agricultural operations, rent from land used for agriculture, and income from farm buildings. However, not all agricultural income is subject to income tax. In this essay, we will discuss the taxability of agricultural income in India.
Taxability of Agricultural Income in India
As per the Income Tax Act, agricultural income is exempt from tax. This means that income earned from agricultural activities is not included in the total income of the taxpayer and is, therefore, not taxable. This exemption is provided to encourage agricultural activities in the country and to support the farmers who depend on agriculture for their livelihood.
However, there are certain exceptions to this exemption. Let’s discuss them in detail:
Agricultural Income exceeding Rs. 5,000
As per the Income Tax Act, if the agricultural income of an individual exceeds Rs. 5,000 in a financial year, the individual is required to file an income tax return and disclose the agricultural income in it. The income tax authorities may also ask for supporting documents to prove the authenticity of the agricultural income.
Income from farming activities carried out outside India
Agricultural income earned by an Indian citizen outside India is taxable in India, provided that the income is not exempt from tax in the country where it was earned. This applies to all individuals who are residents of India and have earned agricultural income outside India.
Income from agricultural land situated outside India
If an individual owns agricultural land situated outside India and earns income from it, the income is not exempt from tax in India and is taxable. The income is required to be included in the individual’s total income and taxed as per the applicable income tax rates.
Agricultural income earned by companies and other entities
The exemption from tax on agricultural income is applicable only to individuals and Hindu Undivided Families (HUFs). Agricultural income earned by companies and other entities is not exempt from tax and is taxable as per the applicable income tax rates.
Basis of Taxation of Agricultural Income
The basis of taxation of agricultural income in India is the net agricultural income earned by the taxpayer in a financial year. The net agricultural income is calculated by deducting the expenses incurred in the process of earning the income from the gross agricultural income earned in that financial year.
Deductions allowed for calculating the net agricultural income
- Expenses related to agriculture: All expenses incurred in relation to the cultivation of crops or plantations are allowed as deductions. This includes expenses such as the cost of seeds, fertilizers, and labour.
- Rent paid for leased land: If the taxpayer has taken agricultural land on lease and paid rent for it, the rent paid is allowed as a deduction from the gross agricultural income.
- Interest paid on loans taken for agricultural purposes: If the taxpayer has taken a loan for agricultural purposes and paid interest on it, the interest paid is allowed as a deduction from the gross agricultural income.
- Depreciation on farm machinery: Depreciation on farm machinery used for agricultural purposes is allowed as a deduction from the gross agricultural income.