LESSON 2

AGRICULTURAL INCOME
STRUCTURE OF THE CHAPTER

2.1 Objectives
2.2 Definition of Agricultural income
2.3 Scheme of Partial Integration
2.4 Summary
2.5 Exercise

2.1 OBJECTIVES

This chapter explains the provisions of Income Tax Act applicable for agricultural
income earned by the assessees.

2.2 DEFINITION OF AGRICULTURAL INCOME

Agricultural Income [Sec. 2(1A)]

“Agricultural income” means:
1. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;

2. Any income derived from land (which is situated in India and is used for
agricultural purposes) by agricultural operations.
Following are the three instances of this type of agricultural income:
a. Any income derived by agriculture from land situated in India and used for
agricultural purposes;
b. Any income derived by a cultivator or receiver of rent-in-kind of any process
ordinarily employed to render the produce raised or received by him to make
it fit to be taken to market; or
c. Any income derived by such land by the sale by a cultivator or receiver of
rent-in-kind of the produce raised or received by him in respect of which no
process has been performed other than a process of the nature described in (b).

3. Income from farm building

Note –
Capital gain arising from the transfer of agricultural land shall not be treated as agricultural
income.
Partly agricultural incomes:
Income1 Non - agricultural Agricultural
income income
Growing and manufacturing tea in India 40% 60%
Sale of centrifuged latex or cenex or latex based 35% 65%
crepes
Sale of coffee grown and cured by seller 25% 75%

2.3 SCHEME OF PARTIAL INTEGRATION

Agricultural income in India is not chargeable to tax which mean totally exempt from tax.
However, agricultural income is taken into consideration while computing the tax on non-
agricultural income of an assessee. This is known as scheme of partial integration.

The scheme of partial integration of non-agricultural income with agricultural income is

applicable if the following conditions are satisfied:
1. The taxpayer is an individual, a HUF, a body of individual, an association of
persons or an artificial juridical person.
2. The taxpayer has non-agricultural income exceeding the amount of exemption
limit [i.e., Rs. 5,00,000 (in the case of a resident super senior citizen who is 80
years or more), Rs. 3,00,000 (in the case of a resident senior citizen who is 60
years or more), and Rs. 2,50,000 (in the case of any other individual or every
HUF) for the relevant previous year].
3. The agricultural income of the taxpayer exceeds Rs. 5,000.

If the above conditions are satisfied, then the scheme of partial integration of tax on non-
agricultural income with income derived from agriculture is applicable.
It is to be noted that this scheme is NOT applicable in the case of a firm, company, co-
operative society etc.

Procedure of computing tax as per the scheme:

Step 1: Net agricultural income is to be computed as if it were income chargeable to
income-tax.

Step 2: Agricultural and non-agricultural income of the assessee will then be aggregated
and income-tax is calculated on the aggregate income as if such aggregate income
were the total income.

Step 3: The net agricultural income will then be increased by the amount of exemption
limit (i.e., the first slab of income on which tax is charged at nil rate) and income-
1
Income in respect of the business given above is, in the first instance, computed under the Act as if it were
derived from business after making permissible deduction. 40% or 35% or 25% of the income so arrived at
is treated as business income and the balance is treated as agricultural income. Salary and interest received
by a partner from a firm is taxable only to the extent of 40% or 35% or 25% and the balance is treated as
agricultural income.
 tax is calculated on net agricultural income, so increased, as if such income was
the total income of the assessee.

Step 4: The amount of income-tax determined at step 2 will be reduced by the amount
of income-tax determined under step 3.

Step 5: Find out the balance. In the balance so arrived, add surcharge and cess. It is to be
noted that for applicability of surcharge, non-agricultural income is considered.

Step 6: This will be the total income-tax payable by the assessee.

2.4 SUMMARY

In this chapter, we have discussed the tax aspect of agricultural income. Though
agricultural income earned in India is exempt from tax, it is still included while
computing income tax of an assessee for other incomes earned by him. It is to be
remembered that agricultural income earned outside India is not treated as an agricultural
income earned in India and thus, such incomes are fully taxable in India.

2.5 EXERCISE

The working notes given below in the solutions of unsolved questions are only for clarity
purposes and for solving some typical concepts. However, in the final examination,
students are expected to be more cautious in preparing working notes. Working notes in
the examination must mention the concepts along with numerical calculation.

Problem 1 –
For the assessment year 2020-21, Mrs. X (Date of birth: Sept. 1, 1950) furnishes the
following information:
Amount (Rs.)
Gross agricultural income 12,21,000
Expenditure on earning agricultural income 90,000
Non-agricultural income (Gross total income) 4,00,000
Determine the tax liability of Mrs. X for the assessment year 2020-21 on the assumption
that she contributes Rs. 60,000 towards PPF and pays insurance premium of Rs. 90,000
on her life insurance policy (sum assured: Rs. 1,50,000).

Solution:
Mrs. X is a senior Citizen.

Computation of taxable income of Mrs. X for the assessment year 2020-21:

Amount (Rs.)
Gross total income 4,00,000
Less: Deduction under section 80C (60,000 + 30,000) 90,000
Net taxable income 3,10,000
In the present case, assessee is a senior citizen whose non-agriculture income is more
than the exemption limit of Rs. 3,00,000 and net agriculture income i.e., Rs. 11,31,000
which is more than Rs. 5,000. So, tax has to be computed as per the scheme of partial
integration which is as follows:

Step 1: Net agricultural income is to be computed as if it were income chargeable to

income-tax. Agricultural and non-agricultural income of the assessee will then be
aggregated and income-tax is calculated on the aggregate income as if such
aggregate income were the total income. Thus, total income including agricultural
income is Rs. 14,41,000 (Rs. 3,10,000 + Rs. 11,31,000).
Tax on Rs. 14,41,000 is Rs. 2,42,300 [1,10,000 + 30% (14,41,000 – 10,00,000)]

Step 2: The net agricultural income will then be increased by the amount of exemption
limit (i.e., the first slab of income on which tax is charged at nil rate) and income-
tax is calculated on net agricultural income, so increased, as if such income was
the total income of the assessee.
Amount (Rs.)
Agriculture income
11,31,000
Add: Exemption limit in case of resident senior citizen 3,00,000
Total 14,31,000

Tax on Rs. 14,31,000 is Rs. 2,39,300 [1,10,000 + 30% (14,31,000 – 10,00,000)]

Step 3: The amount of income-tax determined at step 1 will be reduced by the amount
of income-tax determined under step 2 and find out the balance.
Amount (Rs.)
Tax in step 1 2,42,300
Less: Tax in step 2 2,39,300
Balance (Step 1 minus step 2) 3,000

Step 4: From the balance so arrived, give rebate under section 87A (if applicable), add
surcharge and cess and deduct prepaid taxes (if any). This will be the total
income-tax payable by the assessee. It is to be noted that for applicability of
rebate and surcharge, non-agricultural income is considered.
Amount (Rs.)
Balance 3,000
Less: Rebate under section 87A(if Non-agri total income
does not exceeds Rs.5,00,000) 2,500
500
Add: Cess @ 3% 15
Tax payable 515
Rounded off Rs. 520
Note –
It is assumed that policy is issued on or after April 1, 2012 and thus, maximum limit of
deduction for life insurance premium is 20% of sum assured.
Problem 2 –
From the following information, calculate tax liability of X, a resident and ordinarily
resident in India, for the assessment year 2020-21:
Amount (Rs.)
Income from house property 1,60,000
Income from growing and manufacturing tea in India 1,00,000
Share of profit from a firm carrying agricultural business in India 1,20,000
Donation to Prime Minister’s National Relief Fund 40,000

Solution:
Particulars Non- Agricultural
agricultural income (Rs.)
income (Rs.)
Income from house property 1,60,000 ----
Tea business [40%; 60%] 40,000 60,000
Share of profit from firm [Exempt U/S 10(2A)] Exempt Exempt
Gross total income 2,00,000 60,000
Less: Deduction U/S 80G 40,000 ----
Net taxable income 1,60,000 60,000

Here, tax liability is nil because scheme of partial integration is not applicable as non-
agriculture income (i.e., Rs. 1,60,000) is less than the exemption limit of Rs. 2,50,000.

Notes –
In case of income related to growing and manufacturing tea in India, 40% income is
treated as non-agriculture income and 60% is treated as agricultural income.

Problem 3 –
‘X’ is a non-resident for 2019-20. He earned the following incomes during the previous
year in India:
a. Net agricultural income: Rs. 5,40,000
b. Income from business: Rs. 3,00,000
c. Income from other sources: Rs. 2,60,000
He made the following donations during the previous year:
a. Donations to Prime Minster Relief Fund: Rs. 20,000
b. Donation to Charitable Trust: Rs. 40,000
c. Donation to Delhi Government for promoting family planning: Rs. 30,000
Compute the tax liability of ‘X’ for the assessment year 2020-21.

Solution:
Computation of taxable income of X for the assessment year 2020-21:
Amount (Rs.)
Business income 3,00,000
Income from other sources 2,60,000
 Gross total income 5,60,000
Less: Deduction U/S 80G (W.N. – 1) 63,000
Net taxable income 4,97,000

Add: Net agricultural income 5,40,000

10,37,000
In the present case, assessee is an individual whose non-agriculture income is more than
the exemption limit of Rs. 2,50,000 and net agriculture income (i.e., Rs. 5,40,000) is
more than Rs. 5,000. So, tax has to be computed as per the scheme of partial integration
which is as follows –

Step 1: Net agricultural income is to be computed as if it were income chargeable to

income-tax. Agricultural and non-agricultural income of the assessee will then be
aggregated and income-tax is calculated on the aggregate income as if such
aggregate income were the total income. Thus, total income including agricultural
income is Rs. 10,37,000 (Rs. 4,97,000 + Rs. 5,40,000).
Tax on Rs. 10,37,000 is Rs. 1,23,600 [1,12,500 + 30% on Rs. 37,000 (10,37,000 –
10,00,000)]

Step 2: The net agricultural income will then be increased by the amount of exemption
limit (i.e., the first slab of income on which tax is charged at nil rate) and income-
tax is calculated on net agricultural income, so increased, as if such income was
the total income of the assessee.
Amount (Rs.)
Agriculture income
5,40,000
Add: Exemption limit in case of non-resident 2,50,000
Total 7,90,000

Tax on Rs. 7,90,000 is Rs. 70,500 i.e., [12,500 + 20% (7,90,000 – 5,00,000)]

Step 3: The amount of income-tax determined at step 1 will be reduced by the amount
of income-tax determined under step 2 and find out the balance.
Amount (Rs.)
Tax in step 1 1,23,600
Less: Tax relief on agriculture income as per step 2 70,500

Balance tax amount 53,100

Step 4: From the balance so arrived, give rebate under section 87A (if applicable), add
surcharge and cess and deduct prepaid taxes (if any). This will be the total
income-tax payable by the assessee. It is to be noted that for applicability of
rebate and surcharge, non-agricultural income is considered.
 Amount (Rs.)
Balance tax amount 53,100
Less: Rebate under section 87A Nil
53,100
Add: Cess @ 4% on Rs.53,100 2124

55,224
Tax payable (Rounded off) 55,220

Note –W.N-1
Section 80G:
A-No limit (100%):
Relief fund [20,000*100%] 20,000
B-Limits:
Limit is 10% of adjusted GTI
i.e., 10% of 5,60,000 i.e., 56,000

Family Planning [100% of 30,000] 30,000

Other purpose [50% of 26,000*] 13,000 43,000 63,000

Problem 4 –
Mr. A is resident but not ordinarily resident in India, age 62 years, earned a net
agricultural income of Rs. 4,00,000 during the previous year 2019-20. Compute his tax
liability assuming that he has non-agricultural income of Rs. 8,50,000 and he contributes
Rs. 90,000 towards Public Provident Fund.

Solution:
Computation of taxable income of A for the assessment year 2020-21:
Amount (Rs.)
Gross total income being non-agri.income 8,50,000
Less: Deduction U/S 80C 90,000
Net taxable income 7,60,000
Add: Net agricultural income 4,00,000

Total Income 11,60,000

In the present case, assessee is an individual whose non-agriculture net taxable income
(i.e., Rs. 7,60,000) is more than the exemption limit of Rs. 3,00,000 (resident senior
citizen) and net agriculture income (i.e., Rs. 4,00,000) is more than Rs. 5,000. So, tax has
to be computed as per the scheme of partial integration which is as follows:

Step 1: Net agricultural income is to be computed as if it were income chargeable to

income-tax. Agricultural and non-agricultural income of the assessee will then be
aggregated and income-tax is calculated on the aggregate income as if such
 aggregate income were the total income. Thus, total income including
agricultural income is Rs. 11,60,000 (Rs. 7,60,000 + Rs. 4,00,000).
Tax on Rs. 11,60,000 is Rs. 1,58,000 or [1,10,000 + 30% (11,60,000 –
10,00,000)]

Step 2: The net agricultural income will then be increased by the amount of
exemption limit (i.e., the first slab of income on which tax is charged at nil
rate) and income- tax is calculated on net agricultural income, so
increased, as if such income was the total income of the assessee.
Amount (Rs.)
Agriculture income 4,00,000
Add: Exemption limit in case of non-resident

3,00,000 Total

7,00,000

Tax on Rs. 7,00,000 is Rs. 50,000 [10,000 + 20% (7,00,000 – 5,00,000)]

Step 3: The amount of income-tax determined at step 1 will be reduced by the

amount of income-tax determined under step 2 and find out the balance.
Amount (Rs.)
Tax in step 1 1,58,000
Less: Tax in step 2 50,000
Balance tax 1,08,000

Step 4: From the balance tax so arrived, give rebate under section 87A (if
applicable), add surcharge and cess and deduct prepaid taxes (if any). This
will be the total income-tax payable by the assessee. It is to be noted
that for applicability of rebate and surcharge, non-agricultural income is
considered.
Amount (Rs.)
Balance 1,08,000
Less: Rebate under section 87A Nil
1,08,000
Add: Cess @ 4% 4320
Tax payable 1,12,320

Books recommended –
1. Singhania, V.K. and Singhania, Monica [2018], Students’ Guide to
Income Tax (University Edition), Taxmann Publications (P) Ltd.

2. Ahuja, Girish and Gupta, Ravi [2018], Simplified Approach to Income

Tax (University Edition), Flair Publications Pvt. Ltd.