COMPUTATION

Once the aforementioned conditions are satisfied then we shall compute the Tax
liability in the following manner:

♠ First, include the Agricultural income while computing your income Tax
liability.

Example – Let us say that an Individual Assessee has a Total income of INR
7,50,000/- (excluding Agricultural income) and a Net Agricultural income of INR
100,000/-. Then, per this step, Tax shall be computed on INR 7,50,000/- + INR
1,00,000/- = INR 8,50,000/-. Thus, income Tax amount as per this step shall be
INR 82500/- for an individual who is below the age of 60 Years during the P.Y.
2017-18.

♠ Second, add the applicable basic tax slab benefit, as applicable, to the Net
Agricultural income. Thus, per our example mentioned above we shall add INR
2,50,000/- to INR 1,00,000/- as the applicable Tax slab benefit available to an
individual below 60 Years of age is INR 2,50,000/-. Now we will compute income
Tax on INR 3,50,000/- (Tax slab benefit 2,50,000 + Net Agricultural income
1,00,000). The amount of Tax shall be INR 5000/-.

♠ Third, subtract the Tax computed in Second step from the Tax computed in First
step = INR 77,500/-. Thus, this is the income Tax liability subject to deductions,
Education Cess etc., as applicable.

This process of computation is, however, followed only if the assessee’s non-
agricultural income is in excess of the basic exemption slab.

Clearly, despite agricultural income being tax-exempt, assessees have to be

cautious while dealing with such income. They must make sure that they aggregate
agricultural income with their total income to avoid interest payments and possible
penalties for concealment of income. Assessees must also maintain credible
records to provide the tax authorities with proof of ownership of agricultural land
and evidence of having earned agricultural income.

To conclude, there is enough scope for taxing income from activities which are
non-agricultural in nature. In fact, it is well known that agriculturists themselves do
not have taxable income, taking into account the fact that when it is divided
amongst family members who are involved in agricultural operations, each one of
them would have income within the exemption limit. However, there are hundreds
of thousands of middlemen like wholesalers, retailers, distributors, etc. who earn
substantial income from trading in agricultural produce as well as fruits, flowers,
etc. Such income or profits are fully taxable under the present law and, therefore, if
concerted efforts are made by the Tax Department to recover tax from them, the
need for widening the tax base to rope in agriculturists and farmers, would be
eliminated.

Tax Saving Tip:

Form a company or a partnership firm for the sole purpose carrying on your
agricultural operations. As indirect effect of agricultural income is not applicable
in a company or a firm, the complete amount would become exempt from taxation.

Frequently Asked Questions:

1. Does interest on arrears of rent qualify as agricultural income and will this be
exempt from tax?

Sometimes, a tenant could slip up on rent or revenue payments (either in cash or

kind) and have to pay arrears. If the landlord charges interest on such arrears, the
income would not be considered as an agricultural income, but would be deemed
income by way of interest and would, hence, be chargeable to tax. While ‘rent’
presupposes periodical and pre-determined payment (either in cash or kind),
‘revenue’ implies a sharing arrangement that depends on the actual agricultural
produce. In either case, ownership of agricultural land or interest in such land is
essential, which means, the owners of agricultural land, tenants who are given a
sub-lease, and people who are mortgagees of agricultural land, all enjoy tax-free
agricultural income.

2. If agricultural produce is processed to make it marketable at a place other

than the agriculture land, then the amount charged for such processing will be
an agricultural income or not?

Any processing done on Agricultural produce to make it marketable is a part of

agricultural operations and such amount recovered will be treated as agricultural
income only. Say for example trashing of wheat, mustard, etc is part of agricultural
operations only and the amount recovered will be treated as agricultural income
only no matter processing takes place on the land itself or some other place.

But in certain cases like in the case of tea, coffee, sugarcane where a major
processing (change of very nature of the product) is being done, then some part of
the processed produce (tea, coffee & sugar) is taxed as non-agricultural income and
rest is exempt as agricultural income.

3. What if agriculture operation is carried on urban land?

If agricultural operations are carried out on land, either urban or rural, the income
derived from sale of such agricultural produce shall be treated as agricultural
income and will be exempt from tax.
4. If any industrial organization grows crops and sells half of the produce as raw
material in the market and remaining (further processed) as finished goods,
what will be the tax treatment?

Agricultural income is exempt from income tax. It does not matter whether the
agricultural operations are done by an industrial organization or an individual. If
any industrial organization grows crops and sells half of the produce as raw
material in market and remaining (further processed) as finished goods, the income
which is earned on the first half of produce (sold in market as raw material) is
totally exempt from tax.

In case of the remaining produce which is further processed, scheme of

presumptive taxation is applicable. Rule 7, 7A, 7B & 8 of Income tax Rules deals
with such type of income. Rule 7A deals with Income from manufacture of rubber,
7B deals with Income from manufacture of coffee and Rule 8 deals with Income
from manufacture of tea. Rule 7 says that in cases where income is partially
agricultural in nature and partially from business, the market value of the
agricultural produce which has been raised by the assessee or received by him as
rent in kind and which has been utilised as a raw material, shall be deducted from
the sale receipts and will be treated as agriculture income. The remaining will be
considered as non agricultural income.

5. In my agriculture farm, I have 5 cows in Pune (Maharashtra). The product

being milk is the main produce, and not a byproduct. Is this income an
agriculture income or a taxable income? (This milk is sold to dairy product plant
in nearest Co-op Society).

Dairy farming is not an agricultural income.

6. Why rent on land is treated as agricultural income?

Rent received from agricultural land used for agricultural purpose is treated as
agricultural income. This is prescribed by the law.

7. I have a business income of Rs 3,00,000 and agricultural income of Rs

4,00,000. These figures relate to the Assessment year 2019-20. How will my tax
liability be computed?

Agricultural income is exempt under Section 10(1) of the Act so long as the
income is derived from agricultural land situated in India. This income is, however,
included merely for rate purposes and rebate is allowed on the same in accordance
with the Finance Act. The inclusion of Agricultural income for rate purpose is only
required if total income( excluding agricultural income) of an individual exceeds
Rs. 2,50,000/- (assessee being aged less than 60 years of age).
Particulars Amount in Rs.

Business Income 3,00,000/-

Agricultural Income 4,00,000/-

Income Including Agricultural Income 7,00,000

Tax on 7,00,000/- 52500/-

Less: Rebate on Agricultural Income

(Tax on Rs. 4,00,000 + Rs. 2,50,000 being basic exemption) 42500/-

Net Tax Payable 10,000/-

Add: Health & Education Cess @ 4% 400/-

Total tax Payable 10,400/-

8. Can Interest on Crop Loan be claimed as an exemption?

The interest earned on Crop Loan cannot be claimed as an exemption by the

provider of loan since the condition of ownership of land being not essential holds
true only if the assessee has interest in the land. The provider of the loan may not
have an interest in the land because it may be his ordinary business to provide Crop
Loan. However, the farmer to whom the crop loan is provided can claim the same
as a deduction while computing his tax liability.

9. If an assessee sells the fruits of the trees planted by him around his home, will
the income so earned be agricultural income?

The trees planted by him should be on a land which can be classified as an

agricultural land by fulfilling the conditions mentioned earlier in this article. If the
land is agricultural, then the income earned by selling of fruits can be treated as
agricultural income.

10. I have taken certain agricultural land on lease and crops are being grown on
the said land for many years. Now the said land alongwith growing crops has
been acquired by the Govt. The Govt. paid separate compensation for the land
and the crop. Whether the compensation received in lieu of crop is agriculture
income or not? Further note that assessee has not further invested the amount in
agriculture land received as compensation against crop.

The compensation paid for the crops by the Govt. can be considered to be as good
as income earned by purchase of standing crop, which is not an agricultural
income. Hence the compensation against crop is taxable in the hands of receiver of
the compensation.

11. Whether income earned from export of agricultural produce is exempt from
income tax?

The conditions for considering the income as agricultural in nature have to be

satisfied if the agricultural produce has to be exempt from income tax. Middlemen
dealing in trade of agricultural produce are generally not entitled to exemption due
to lack of satisfaction of the conditions.

12. I have an income of Rs.1,45,000 from my business and an agricultural

income of Rs. 8,40,000. Do I need to file the return of income?

The process of computation of tax liability is followed only if the assessee’s non-
agricultural income is in excess of the basic exemption slab. In this case, the
income from business of the assessee is lower than the basic exemption limit.
However, the returns have to be filed with regards to the disclosure of agricultural
income.

13. An assessee wants to buy farms which bear coconut trees, on a lease for a
period of one year. State whether sale of coconuts is said to be an agricultural
income or not?

The land on which the coconut trees are planted should be an agricultural land
which can be classified by fulfilling the conditions mentioned earlier in this article.
If the land is agricultural, then the income earned by selling of coconuts can be
treated as agricultural income.

14. I had sold an agricultural land in a rural area, which is outside jurisdiction
of the Municipal Authority. Whether the sales proceeds are exempt or taxable?

The scope of agricultural income excludes the revenue which is earned by transfer
of agricultural land not falling under the definition of Capital assets u/s. 2(14). By
definition of a capital asset under Section 2(14), an agricultural land in an area
falling out of jurisdiction of the Municipal Authority (which has a population of
more than 10,000), is not a capital asset. Section 10(37) allows income from
transfer of such a land to be classified as a capital gain via clause (i). Under
Section 54B, a capital gain arising out of this transaction will be exempt provided
the conditions (mentioned earlier in this article) are satisfied.
15. Is receipt from sale of rubber trees an agricultural income?

Yes, receipt of sale of rubber trees is an agricultural income if the conditions for
land being agricultural in nature are satisfied.

Taxability of Agriculture income with Example.

all we that if Assessee having only Agricultural Income it is Exempt from Income Tax
u/s 10(1) , But Income Tax Act Indirectly collect tax on Agricultural income from all
Individuals ,HUFs,AOP & BOI Whose Agricultural Income Exceeds Rs.5,000 and Non
Agricultural Income Should exceed the Maximum amount not chargeable to tax ( As
per Finance Act 2016 Maximum amount not chargeable to tax is Rs.2,50,000 ).
Procedure for Computation of tax persons having Agriculture Income Exceeds
Rs.5,000 and Non Agricultural Income Should exceed the Maximum amount not
chargeable to tax as follows

1. Calculate of Agriculture Income + Total Income

2. Calculate tax on Step 1
3. Calculate Agriculture Income + Basic Exemption (i.e Rs 2,50,000)
4. Rebate for Agriculture Income = Tax on Step 3
5. Calculate Net Tax Payable = Step 2 – Step 4
6. Calculate EC and SHEC i.e total 3% on Step 5
7. Calculate Net Tax Payable = Step 5 + Step 6.

Let us see with Example:

Example 1 :

 Agriculture Income = Rs 2,00,000.

 Non Agricultural Income = Rs. 6,00,000.
 Chapter VIA deductions Say u/s 80C = Rs. 50,000.
 Total Income (Rs.6,00,000 – 50,000) = Rs.5,50,000.