Agricultural income is commonly viewed as entirely tax-free, but few complications are involved in its tax treatment. While agricultural income itself is not directly taxed under the Income Tax Act, it is indirectly brought under the tax bucket through a method known as partial integration. This approach combines agricultural income with non-agricultural income to determine the applicable tax rate on the non-agricultural income. In this blog, we’ll dive into how agricultural income is treated for tax purposes and how it impacts an individual’s overall tax planning.
Like what you're reading?
Get our latest, straight to your inbox.
What is Agricultural Income?
Under Section 10(1) of the Income Tax Act, agricultural income is fully exempt from tax. The law defines agricultural income as:
- Income from cultivating and selling goods that are produced on agricultural land in India.
- Rent or revenue from land that is used for agricultural purposes.
- Income from buildings associated with the land used for agriculture eg. farmhouse or nursery situated on or near the agricultural land.
This means that earnings from crop production, the sale of produce, or renting agricultural land are considered agricultural income.
Examples of Non-Agricultural Income
- Breeding of Livestock
- Poultry Farming
- Fisheries
- Dairy farming
- Bee hiving
- Fisheries
- Cutting and Selling timber trees
- Butter and Cheese-making
When Does Agricultural Income Become Taxable?
Generally, agricultural income is exempt from tax, however, the concept of partial integration comes into play when your net agricultural income exceeds ₹5,000 and the non-agricultural total income exceeds the basic exemption limit.
What is partial integration method?
The income tax authorities use partial integration method to calculate the tax slab applicable to you. Under this method, your agricultural income is added to your non-agricultural income to determine the overall tax rate. The primary purpose of this approach is to tax your non-agricultural income at a higher rate, based on the combined income. However, the actual agricultural income remains tax-free.
Conditions for Partial Integration
- Agricultural Income: If your total agricultural income is more than ₹5,000 per annum.
- Non-Agricultural Income: If your non-agricultural income is more than the basic exemption limit as mentioned below:
| Age Bracket | New Tax Regime | Old Tax Regime |
| Resident Individuals (less than 60 years) | 3,00,000 | 2,50,000 |
| Resident Senior Citizens (≥ 60 years but < 80 years) | 3,00,000 | 3,00,000 |
| Resident Super Senior Citizens (≥80 years) | 3,00,000 | 5,00,000 |
Example of Partial Integration
Let’s simplify the method of partial integration with an example:
Mr. Ram, a 42-year-old farmer, has the following income in the financial year 2024-25:
- Agricultural income: ₹7,00,000
- Non-agricultural income: ₹6,00,000
In this case, Ram’s agricultural income exceeds ₹5,000, and his non-agricultural total income is above the basic exemption limit of ₹2.5 lakh. So, his total income will be considered for partial integration.
Step-by-Step Calculation:
Step 1: Calculate the tax on total income (agricultural + non-agricultural)
Total income = Agricultural income + Non-agricultural income
= ₹7,00,000 + ₹6,00,000 = ₹13,00,000
Now, calculate the tax on ₹13,00,000 using the income tax slab rates applicable (assuming he opts for old tax regime) for FY 2024-25:
- On ₹2,50,000 = NIL (basic exemption)
- On ₹2,50,001 to ₹5,00,000 = 5% of ₹2,50,000 = ₹12,500
- On ₹5,00,001 to ₹10,00,000 = 20% of ₹5,00,000 = ₹1,00,000
- On ₹10,00,001 to ₹13,00,000 = 30% of ₹3,00,000 = ₹90,000
Total tax = ₹12,500 + ₹1,00,000 + ₹90,000 = ₹2,02,500
Step 2: Calculate the tax on (agricultural income + basic exemption limit)
Basic exemption limit = ₹2,50,000 (for individuals under 60) + Agricultural Income (₹7,00,000)
₹7,00,000 + ₹2,50,000 = ₹9,50,000
Now calculate the tax on ₹9,50,000:
- On ₹2,50,000 = NIL (basic exemption)
- On ₹2,50,001 to ₹5,00,000 = 5% of ₹2,50,000 = ₹12,500
- On ₹5,00,001 to ₹9,50,000 = 20% of ₹4,50,000 = ₹90,000
Total tax = ₹12,500 + ₹90,000 = ₹1,02,500
Step 3: Subtract the tax on agricultural income from tax on total income
Now, subtract the tax calculated in Step 2 from the tax calculated in Step 1:
Tax on ₹13,00,000 (total income) = ₹2,02,500
Tax on ₹9,50,000 (agricultural income + basic exemption) = ₹1,02,500
Tax payable = ₹2,02,500 – ₹1,02,500 = ₹1,00,000
Step 4: To ascertain total liability, add Education Cess on the tax liability @ 4%
Education cess @ 4% on tax payable = ₹4,000
Total tax liability = ₹1,04,000
Thus, Ramesh will pay ₹1,04,000 as tax on his non-agricultural income, even though his agricultural income is fully exempt.
Conclusion
Whether you are a farmer or someone with investments in agricultural land, it’s essential to consider both agricultural and non-agricultural income when calculating your total tax liability. Understanding the income tax provisions related to agricultural income is crucial for taxpayers. Many people assume that since agricultural income is tax-free, there won’t be any future tax liabilities. However, during processing of income tax return filed, tax authorities apply tax on non-agricultural income on the basis of partial integration, if applicable, which can become stressful for individuals.
Proper tax planning will help you avoid surprises. By carefully integrating agricultural and non-agricultural income, you can better manage your tax liability while staying compliant with the law. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.
