Agricultural Income – Is it really tax free?

1 Agricultural income is exempt from Income Tax [Courtesy: Section 10(1) of the Income Tax Act-1961]. However, it also carries some tax effect if person earning agricultural income have other taxable income which is chargeable to tax. New ITR forms have a special focused eye on agricultural income.

Agricultural income is included for rate purposes, in computing the Income Tax Liability if Net Agricultural income exceeds Rs. 5,000/- .

Aggregation provision of agricultural income for rate purpose is applicable for Individual, HUF, AOP, BOI & Artificial judicial Person. It is not applicable to Firms & Companies.

To know the tax implications of agricultural income, let us consider the example of Mr. Shyam, a young taxpayer aged around 40 years, who has earned business/salary income of Rs. 6 Lakh & agricultural income of Rs. 4 Lakh during FY 2018-19.

Mode of computing Tax liability if taxpayers have agricultural income:

1. Taxpayer first needs to aggregate Agricultural income with other income & then compute the Tax liability on aggregate income (i.e., agricultural income plus other income of the taxpayer). Aggregate income of Mr. Shyam in above example is Rs. 10 Lakh. The tax liability on Rs. 10 Lakh will be Rs.  1,12,500/- (i.e., Rs. 2.50 Lakh exempt, Rs. 2.50 Lakh @ 5% = Rs. 12,500/- & Rs. 5 Lakh @ 20% = Rs. 1 Lakh).
2. Taxpayer then needs to add the applicable basic exemption limit to the Agricultural income & required to compute the tax liability.  In above example, applicable basic exemption limit for Mr. Shyam is Rs. 2.50 Lakh   and so the tax would be required to be computed on Rs. 6.50 Lakh (Rs. 2.50 Lakh + Rs. 4 Lakh of agricultural income). The total tax would be Rs. 42,500/- (i.e., Rs. 2.50 Lakh exempt, Rs. 2.50 Lakh @ 5% = Rs. 12,500/- & Rs. 1.50 Lakh @ 20% = Rs. 30,000/-).
   [For senior citizen & very senior citizen, basic exemption limit is Rs. 3 Lakh & Rs. 5 Lakh respectively]
3. Final Tax Liability:
   Now, the net tax liability of Mr. Shyam would be the amount computed at (1) above as reduced by amount computed at (2) above. i.e., Rs. 70,000/- [Rs. 1,12,500 less Rs. 42,500]

What taxpayer needs to observe here is the implication of agricultural income on tax of Mr. Shyam. Without agricultural income, tax liability of Mr. Shyam on income of Rs. 6 Lakh would have been Rs. 32,500/- only (i.e., Rs. 2.50 Lakh exempt, Rs. 2.50 Lakh @ 5% = Rs. 12,500/- & Rs. 1 Lakh @ 20% = Rs. 20,000/-). But since he has earned agricultural income, his tax liability is Rs. 70,000/- i.e., an increase of Rs. 37,500/-.

Interestingly, this increase in tax effect by Rs. 37,500/- is for the simple reason that Mr. Shyam has earned the so called tax free agricultural income of Rs. 4 Lakh. Due to variation in income tax slab, the tax impacts of agricultural income on taxpayers keep varying.

Following sample chart can enable taxpayers to draw a better conclusion:

S.No.	Case	I	II	III	IV
a]	Regular Taxable Income	300000	400000	900000	1050000
b]	Agricultural Income	100000	500000	100000	100000
c]	Applicable basic exemption limit	250000	250000	250000	250000
d]	Total of (b) + (c)	350000	750000	350000	350000
e]	Aggregate Income (a+b)	400000	900000	1000000	1150000
f]	Tax on (e) above	7500	92500	112500	157500
g]	Tax on (d) above	5000	62500	5000	5000
h]	Net Tax Liability	2500	30000	107500	152500
i]	Tax on (a) above [No Agri income]	2500	7500	92500	127500
j]	Additional Tax due to Agri (b) income	0	22500	15000	25000
k]	Additional Tax as a % of Agri. income	0%	5%	15%	25%

Individual whose other regular taxable income is below the basic exemption limit will not at all be affected by the aggregation provision at all, as his ultimate tax liability would remain nil only. In all other cases (except situations like I above), it is bound to have some additional tax effect due to agricultural income.