What is agricultural income and how is it taxed?

Agricultural income is the primary source of income for a majority of Indians, especially the rural India. If you or someone you know earns income from agriculture or related activities, this thread is for you.

Firstly, let’s see what qualifies as agricultural income.

  1. Rent from agricultural land, storeroom, residential place and outhouse.
  2. Income from the sale of agricultural produce.

:bulb:In the case of tea and coffee cultivation, 60% of the total income is considered as agricultural income and the remaining 40% is considered non-agricultural income.

Is agricultural income entirely exempt from taxes?

Agricultural income is completely exempted from taxation if it is the only source of income.
However, if you have other sources of income, it becomes taxable in the following cases:

  • Agricultural income > ₹5,000
  • Non-agricultural income exceeds the basic exemption limit of ₹2.50L.

How is tax liability calculated when you have agricultural income?

Generally, all your incomes for a particular are added and your applicable tax slab is identified based on this. But, in case of agricultural income taxes will be calculated a little differently.

You’ll have to follow the below steps:

  • Calculate tax on total income (agricultural income + non-agricultural income)
  • Calculate tax on Agricultural Income + Basic Exemption Limit
  • Subtract both the above values and the resulting amount would be your tax liability.

Let’s take an example,

Say you have a ₹10L income from agricultural sources and you also have income from other sources of ₹5L. So, your tax liability will be calculated as follows:

  • Tax on total income (₹10L + ₹5L) = ₹2,62,500 (A)
  • Tax on Agricultural Income + Basic Exemption Limit (₹10L + ₹2.5L) = ₹1,87,500 (B)
  • Net tax liability (A-B)= ₹75,000

Also, as the non-agricultural income is below ₹5L, a rebate u/s 87A of ₹12,500 will also be available on the tax liability. Hence, your net tax payable would be as follows:

₹75,000 - ₹12,500 = ₹62,500 + 4% cess

*these calculations are as per the old tax regime

Which ITR form needs to be filed to report agricultural income?

If the agricultural income is up to ₹5,000, you can file ITR-1. However, if it exceeds ₹5,000, ITR-2 will be applicable.