Definition of Agricultural Income (Section 2(1A))

Rent derived from agricultural land

This refers to any income received as rent or revenue from land situated in India and used for agricultural purposes. It must be derived directly from the land and not from a business or other commercial activity.

Example: Leasing agricultural land for cultivation and receiving rent qualifies as agricultural income.

Income derived from agricultural operations

Income generated from basic agricultural activities such as sowing, irrigation, cultivation, and harvesting. It includes revenue from selling the produce after these activities.

Example: Profits from growing and selling wheat, rice, or sugarcane after cultivating the land are treated as agricultural income.

Income derived from processing agricultural produce

When agricultural produce is processed to make it marketable without altering its essential character, the income is considered agricultural.

Example: Drying or cleaning harvested paddy to sell it in the market is part of agricultural income. However, converting sugarcane to jaggery may not qualify fully.

Meaning of Agricultural Land

Agricultural land is land used for agricultural activities such as cultivation of crops or rearing of livestock. The classification of land as agricultural depends on its usage, location, and the intent behind the use.

• Must be located in India.
• Should be used for farming activities, horticulture, or other related purposes.
• Urban agricultural land may not always qualify for exemption depending on its proximity to a municipality or town.

Note: Land used for building construction or held as stock-in-trade by a real estate developer is not considered agricultural land.

Tests for determining agricultural income

To qualify as agricultural income, the following key tests must be satisfied:

1. Existence of Land: The income must arise from land that is used for agricultural purposes.
2. Usage of Land: The land must be cultivated or used for agricultural operations such as ploughing, sowing, watering, and harvesting.
3. Ownership or Right: The assessee must have legal ownership or tenancy rights to derive income from the land.
4. Proximity to Market: The extent of processing should be limited to make produce marketable in its natural form. Excessive processing or value addition may result in income becoming partially taxable.

Example: Cultivation and sale of paddy = agricultural income (exempt); Manufacturing biscuits from wheat = not agricultural income (taxable).

Exemption of Agricultural Income (Section 10(1))

Conditions for exemption

According to Section 10(1) of the Income Tax Act, agricultural income earned in India is fully exempt from tax. However, the following conditions must be met for the exemption to apply:

• The income must be derived from land situated in India.
• The land should be used for agricultural purposes, such as cultivation or related activities.
• The income must arise from operations such as tilling, sowing, irrigation, and harvesting.
• Processing should be limited to making the product marketable in its natural form.

Note: Agricultural income from land located outside India is not exempt and is taxable.

Partial Integration of Agricultural Income

When agricultural income is clubbed with non-agricultural income

Agricultural income, though exempt, is considered for rate calculation when:

• The assessee is an individual, HUF, AOP, BOI, or artificial juridical person.
• Agricultural income exceeds ₹5,000 during the financial year.
• Non-agricultural income exceeds the basic exemption limit:
  • ₹2,50,000 for individuals below 60 years
  • ₹3,00,000 for individuals between 60–80 years
  • ₹5,00,000 for individuals above 80 years

Calculation of tax rate

Partial integration involves three steps:

1. Compute tax on the aggregate of agricultural income + non-agricultural income.
2. Compute tax on the sum of agricultural income + basic exemption limit.
3. Tax liability = Step 1 result – Step 2 result

Example:

Since both conditions are met, partial integration will be applied to determine the tax rate on ₹3,00,000.

Taxation of non-agricultural income in presence of agricultural income

If the above-mentioned conditions are met, agricultural income impacts the tax rate applicable to non-agricultural income. Although the agricultural portion remains tax-free, the non-agricultural income is taxed at a higher slab rate due to the inclusion of agricultural income for rate determination.

Key Points:

• This ensures that taxpayers with high agricultural income do not evade higher taxes on non-agricultural income.
• This method increases the effective tax rate without taxing the exempt agricultural income.

Important: If agricultural income is ₹5,000 or less, or if total income is within the basic exemption limit, partial integration does not apply.