How To Calculate Agriculture Income Tax?

The discovery of agriculture was the first big step towards a civilized life.

-   Arthur Keith

For several decades our country was an economy, dependent solely on agriculture. Farmers were the life blood of the Nation. Today, India is a service based economy. An IT Superpower. Yet, agriculture is still very important for the growth of the Nation. Just take a look at inflation….A few years ago, inflation looked out of control. The main culprit….soaring food prices. With prices of dal, vegetables and fruits going through the roof, India is looking back to agriculture.Now to the big question….What is agricultural income? You get rent/revenue from land in India, used for agricultural purposes. You get money from the commercial sale of agricultural produce, from agricultural land. All this is agricultural income.

Remember: You have to use the land for agricultural operations. You have to make some effort, so that crops sprout from the land. You have to cultivate the land.

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How to calculate agriculture income tax?

Agricultural income is income derived from farming land, rent/revenue received from land in India used for agricultural purposes. Agricultural income is got from land used for agricultural operations which include processing of agricultural produce to make it fit for the market and the subsequent sale of the agricultural produce. Agricultural income also includes the income got from any building in the immediate vicinity of the agricultural land. This land would be owned or occupied by:

• Receiver of the rent/revenue on the agricultural land.
• The cultivator of agricultural land.
• One who receives rent-in-kind. 

You do not have to pay income tax on your agriculture income, irrespective of the amount of agricultural income you earn. Isn’t this a good enough reason to take up farming? The Central Government cannot charge tax on agriculture income. The State Government can charge tax on agriculture income. However if your agricultural income is within INR 5,000 a year, no tax will be charged.

Examples of agricultural income:

• The income you get from the sale of replanted trees and seeds.
• The rent you get from agricultural land.
• The income you get from growing flowers and creepers.
• The profits you get from a partner or a firm which is engaged in agricultural produce or related activities.
• Interest on the capital that a partner from a firm who is engaged in agricultural operations gets.
• The agricultural land is used for storage of produce or even as a dwelling unit.
• The agricultural land must be occupied by the cultivator of the land or he should be in ownership of the cultivated land.

Examples of Non-agricultural income

• Income from poultry and bee hiving.
• Income from dairy farming.
• Income from spontaneously grown trees.
• Income got by flooding agricultural land to produce salt.
• Income got from making butter and cheese.
• Income got as royalty from mines.
• Income received from TV serial shooting at farm house.
• Income got by purchasing standing crop.
• Dividends a Company pays out of agricultural income.

Is Agricultural Income Taxable?

Under Section 10(1) of the income tax act, agricultural income is exempt from tax and not included under total income. The Central Government cannot charge tax on agricultural income. States can levy tax on agricultural income. If agricultural income is less than Rs 5,000 in a financial year, it will not be accounted for tax purposes. Under the Finance Act, total tax liability includes any agricultural income added to non-agricultural income.

When is agricultural income taxed? States levy tax on agricultural income if income exceeds Rs 5,000 a year and if total income excluding agricultural income exceeds basic tax exemption slab. 

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How is agriculture income taxed?

Let’s go through these important points, before we get down to calculations:

• The Government has found an indirect way, to make sure you pay tax on your agricultural income. This is a concept known as partial integration of taxes.

The two conditions you have to satisfy before your income is taxed under partial integration:

• Your net agricultural income should exceed INR 5,000 a year.
• Your non agricultural income should exceed the basic tax exemption limit.

If your annual income is more than INR 2,50,000  a year (male/female under 60 years), If your annual income is more than INR 3,00,000  a year (senior citizen between 60 years to 80 years) and If your annual income is more than INR 5,00,000 a year, (super senior citizen above 80 years),  your income is taxed under partial integration.

Learn how agriculture income is taxed

Let’s understand how agriculture income is taxed with a simple example: Nitish who is 40 years, works in a garment firm and earns a salary of INR 7 Lakhs a year. Nitish also earns INR 2.4 Lakhs a year, as agricultural income from renting out agricultural land. Let’s calculate, Nitish income tax liability.

STEP 1:

Add          agriculture income + non agriculture income

• Nitish earns INR 2.4 Lakhs a year as agriculture income and INR 7 Lakhs a year, as non agriculture income.

Add          INR 2.4 Lakhs   +   INR 7 Lakhs = INR 9.4 Lakhs.

STEP 2:

Compute tax on the aggregate income.

Income Tax Slab For FY 2016-17:

• Nitesh total income (agricultural + non agricultural) is INR 9.4 Lakhs. Nitesh falls in the INR 5,00,001 to INR 10,00,000 slab. His income is taxed at 20%. Nitesh has to pay an income tax of INR 1,13,000.

Amount of income tax Nitesh pays = INR 1,13,000.

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STEP 3:

Add the basic tax exemption limit for the relevant financial year FY 2016-17, to the net agricultural income.

• Nitish enjoys a basic tax exemption of INR 2.5 Lakhs. He also earns an agricultural income of INR 2.4 Lakhs.
• The aggregate amount is INR 2.5 Lakhs + INR 2.4 Lakhs = INR 4.9 Lakhs.

STEP 4:

Calculate income tax on the aggregate amount which you have arrived at in STEP 3

You have to calculate income tax on the aggregate amount of INR 4.9 Lakhs shown in STEP 3.

• The basic exemption limit is INR 2.5 Lakhs.

You have to calculate income tax on INR 4.9 Lakhs – INR 2.5 Lakhs = INR 2.4 Lakhs. This amount is taxed at 10%.

Income tax on aggregate amount = INR 2.4 Lakhs @ 10% = INR 24,000.

STEP 5:

Deduct the amount calculated in STEP 4 from the amount calculated in STEP 2.

To get Nitish income tax liability, you have to deduct the income tax on aggregate amount shown in STEP 4 from amount of income tax Nitesh pays in STEP 2.

This is INR 1,13,000  -  INR 24,000  =  INR 89,000.

STEP 6:

You have to subtract the rebate you get under Section 87A.

If your total income does not exceed INR 5 Lakhs a year, you get an income tax rebate of INR 5,000 under Section 87 A. Nitish earns a salary of INR 7 Lakhs a year and is not eligible for the rebate.

STEP 7:

You have education cess at 2% and secondary and higher education cess at 1%. The total cess is 3%.

Nitish has to pay cess of 3% on the income of INR 89,000, which is INR 2,670. Nitish has to pay a total income tax of INR 91,670.

Yes….The Government has even found a way of taxing your agricultural income. Trust the Government to do something different.

Agriculture Income Tax Calculation 2017-18

Example2

Let’s take a look at agriculture income tax calculations with examples. Let’s say you are 50 years and earn Rs 6 Lakhs a year from non agricultural income. You earn Rs 5 Lakhs a year from agricultural income.

As per agriculture income tax rules, non-agricultural income exceeds the Rs 2.5 Lakhs a year, basic tax exemption limit. (This is Rs 3 Lakhs a year for citizens between 60-80 years of age). Agricultural income exceeds Rs 5,000 a year.

STEP 1:

Add: Agricultural Income + Non Agricultural Income

This is Rs 5 Lakhs + Rs 6 Lakhs = Rs 11 Lakhs.

STEP 2:

Compute tax on the aggregate income:

Income Tax Slab for FY 2017-18

• Total income (Agricultural + Non agricultural) is Rs 11 Lakhs. You fall in the 30% income tax slab. You have to pay an income tax of Rs 1,42,500.

STEP 3:

Add the basic tax exemption limit for FY 2017-18 to net agricultural income.

• The basic tax exemption limit is Rs 2.5 Lakhs and the agricultural income is Rs 5 Lakhs.
• The aggregate amount translates to Rs 7.5 Lakhs.

STEP 4:

Calculate income tax on the aggregate of STEP 3. (This is Rs 7.5 Lakhs).

• The basic tax exemption limit is Rs 2.5 Lakhs.
• You have to calculate income tax on Rs 7.5 Lakhs.

Income tax on aggregate amount = Rs 62,500.

STEP 5:

Deduct the amount calculated in STEP 4 from the amount calculated in STEP 2.

This is Rs 1,42,500 – Rs 62,500 = Rs 80,000.

STEP 6:

You have to subtract the rebate you get under Section 87A. If your total income does not exceed INR 3.5 Lakhs a year, you get an income tax rebate of INR 5,000 under Section 87A. It is not applicable in this case.

STEP 7:

Cess on income tax is 4%. You have to pay a cess of 4% on Rs 80,000 which is Rs 3,200. The total income tax is Rs 83,200. 

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