Computation of tax on income from agricultural land

Introduction

Income from agriculture land can be either from agricultural operation or from transfer of such land. Income from agricultural land is exempt from tax. However, the agriculture income is included in the total income of a specified assessee where such income exceeds Rs. 5,000 and the non-agricultural income exceeds the maximum exemption limit. This scheme is called partial integration of non-agricultural income with agriculture income. The taxability of income from transfer of agricultural land depends upon the location of such land. If the agricultural land is located in rural area then any income arising from transfer of such land shall not be chargeable to tax.

1. Exemption from tax

1.1. Exemption for agriculture income

Agricultural income is exempt from tax under Schedule II [Table S. No. 1] of the Income-tax Act in the hands of every assessee. The agriculture income is exempt from tax due to the reason that the Constitution of India gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature. However, there is concept of partial integration of agriculture income with non-agriculture income to determine the rate of tax on non-agriculture income.

Since agricultural income is exempt from tax, any loss arising from agricultural activities cannot be set off against any other income and hence, such losses cannot be carried forward.

1.2. Exemption for capital gain from sale of agricultural land

Section 2(22) of the Income-tax Act defines the meaning of capital asset. This definition keeps the rural agriculture land out of the scope of capital asset.

An agricultural land is treated as rural agricultural land if it is situated beyond the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and it does not fall within following distances (to be measured aerially):

(a) Up to 2 kms from local limits of the municipality or cantonment board, if population of such municipality or cantonment board exceeds 10,000 but does not exceed 1,00,000;

(b) Up to 6 kms from local limits of the municipality or cantonment board, if population of such municipality or cantonment board exceeds 1,00,000 but does not exceed 10,00,000;

(c) Up to 8 kms from local limits of the municipality or cantonment board, if population of such municipality or cantonment board exceeds 10,00,000.

Thus, for capital gain purposes, an agricultural land is classified into two categories; a) Rural Agricultural Land and b) Urban Agricultural Land. Any gain arising from transfer of rural agricultural land is not chargeable to tax under the head Capital Gains because such land is specifically excluded from the definition of capital asset. Whereas, gain arising from transfer of urban agricultural land is chargeable to tax under the head Capital Gains. However, an individual or HUF shall be exempt from paying tax on capital gain arising from transfer of urban agricultural land in following cases:-

(a) Compulsory acquisition of land

Where urban agricultural land of assesse being an individual or HUF is compulsorily acquired under any law then the assesse shall be entitled for exemption under Schedule III [Table S. No. 18] .

(b)  Investment in new agricultural land

An individual or HUF shall be entitled for exemption under Section 83 where capital gain arising from transfer of an urban agricultural land is further invested for purchase of new agriculture land (whether urban or rural).

2. Partial integration of agriculture income

2.1. Conditions to apply partial integration

Though the agricultural income is exempt from income tax, however, it is included in the total income of a specified assessee where agricultural income exceeds Rs. 5,000 and the non-agricultural income exceeds the maximum exemption limit. This scheme is called partial integration of non-agricultural income with agriculture income. Such partial integration is done if following conditions are satisfied:

(a) Taxpayer is an individual, HUF, BOI, AOP or an Artificial Juridical Person;

(b) The taxpayer has non-agricultural income exceeding the amount of maximum exemption limit

(c) The agricultural income of the taxpayer exceeds Rs. 5,000.

The scheme of partial integration is not applicable in the case of a firm, company, co-operative society, etc.

2.2. Method of partial integration

If net agricultural income does not exceed Rs. 5,000, the provisions of aggregation do not apply. Where net agricultural income exceeds Rs 5,000, the whole of such income is to be considered for computation of income-tax provided the total income (non-agricultural) exceeds the maximum exemption limit.

The manner of tax calculation in case of partial integration regime is as below:

Step 1: Calculate net agricultural income.

Step 2: Calculate tax on aggregate of non-agricultural total income and net agricultural income, as if such income is the total income.

Step 3: Calculate tax on aggregate of net agricultural income and maximum exemption limit as if such income is the total income.

Step 4: The amount of tax calculated in Step 2 shall be reduced by the amount of tax calculated in Step 3.

Step 5: The result of Step 4 shall be reduced by rebate under Section 156, if applicable. The resultant figure shall be increased by surcharge and health and education cess.

Step 6: The amount so arrived in Step 5 is the final tax liability payable by the assessee.

2.3. Calculation of agriculture income for partial integration

For the purpose of computing tax in accordance with partial integration regime, the net agricultural income will be computed in accordance with the Rules prescribed in the Part IV of the First Schedule to the Finance Act.

2.3-1. Rent or Revenue derived from a land

Agriculture income of the nature referred to in Section 2(5)(a), i.e., any rent or revenue derived from a land which is situated in India and is used for agricultural purposes, shall be computed on the same basis as is adopted for the computation of income under the head ‘Income from Other Sources’. However, while determining the expenditures which are not allowable as deduction expenditures referred under Section 36(4)/(5)/(8) shall not be disallowed, i.e., while computing this agricultural income, the cash payments exceeding Rs. 10,000 shall be allowed as deduction.

2.3-2. Any income derived from land by agriculture

Agriculture income of the nature referred to in Section 2(5)(b), i.e., any income derived by agriculture from land situated in India or from any process, shall be computed as if it were income chargeable to tax under the head ‘Profits and gains of business or profession’. However, while determining the expenditures which are not allowable as deduction expenditures referred under Section 36(4)/(5)/(8) shall not be disallowed, i.e., while computing this agricultural income, the cash payments exceeding Rs. 10,000 shall be allowed as deduction.

2.3-3. Income from farm building

Agriculture income of the nature referred to in Section 2(5)(c), i.e., income from a farm building required as a dwelling house, shall be computed as if it were income chargeable to tax under the head ‘Income from house properties’.

2.3-4. Partly agricultural and partly business income

Where an entity carries both agricultural and non-agricultural activities, the profits arising from the business shall be both agricultural income and non-agricultural income. In such a situation, the income from agricultural operation is computed on a presumptive basis according to Rule 271 [Table S. No. 1 to 4].

2.3-5. Income of member of AOP or BOI

If an assessee is a member of an AOP or BOI (other than an HUF, company or firm) which in the tax year has either no income chargeable to tax or has non-agricultural income not exceeding the taxable amount but has any agricultural income, then the agricultural income or loss is computed in accordance with these rules and the share of the assessee in the agricultural income or loss so computed is regarded as his agricultural income or loss.

2.3-6. Set-off of loss from agricultural operation

Any loss incurred in agriculture is allowed to be set off against any other source of agricultural income during the same year. A member of AOP or BOI cannot set off his share of agricultural loss from AOP or BOI against his agricultural income.

2.3-7. Deduction for State taxes

Any tax levied by a State government on agricultural income is allowed as a deduction in computing net agricultural income.

2.3-8. Carry forward of agricultural loss

Any unabsorbed agricultural loss can be carried forward and set off only against agricultural income within the prescribed time limit of 8 years. However, where the agricultural business of the assessee is succeeded, other than by inheritance, set off of losses shall be allowed to the person who has incurred such losses only.

Example, the unabsorbed loss from agricultural activities during the tax year 2018-19 to 2025-26 will be set off against the agricultural income of the tax year 2026-27 in chronological order.

2.3-9. Loss from agriculture operation

If the net result of the computation of agricultural income is a loss, it is to be disregarded, and agricultural income is taken as nil. An agricultural income is aggregated for the purpose of determining the rate of income-tax only if it is in excess of Rs 5,000, net agricultural loss shall be ignored for the purpose of aggregation while determining such rates.

2.3-10. Rounding off the agricultural income

The net agricultural income is rounded off to the nearest multiple of Rs. 10.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.