Not All Farm Incomes Escape Tax..!

by TAPATI GHOSH,  AMARANATH AMBATI, 

Deloitte Haskins & Sells LLP

Only income from actual farming is exempt from tax

Things as mundane as travelling, eating out, shopping, watching a movie, investing — everything requires you to shell out a share to the taxman.

Yet there’s one large slice of the economy which escapes taxes - agriculture. But not all kinds of agricultural income are exempt from tax.

Say, Mr. Ram is an agriculturist and derives some income from agriculture. He also owns lands and farm houses in the outskirts of a city as well as in his village.

Mr. Ram thinks the income generated from the agricultural land and farm houses is completely exempt from tax. But there are several aspects to be considered.

What is agri income..?

The Income Tax Act defines agricultural income as any rent or revenue received from the land which is situated in India & used for agricultural purposes; any income generated from agricultural land by performing agricultural activities and income from a farm house.

To qualify for exemption, agricultural land must be situated within India. Mr. Ram’s land meets this requirement.

Mr. Ram’s income, if derived from agricultural activities, would be completely exempt from tax, regardless of the plot of land being situated within the city limits or / in a village.

However, to claim tax exemption, his income must originate from agricultural activities, which are defined as basic operations such as sowing, planting and subsequent operations such as weeding, cutting and so on.

Merely performing weeding or cutting, without sowing or / actually growing crops, may not constitute farm operations.

However, the term agriculture is sweeping enough to include all sorts of crops or products.

Therefore, raising vegetables, fruits, grass, coffee, tea, tobacco and commercial crops like cotton, jute, hemp all would fall within the ambit of ‘agriculture’.

In some situations, where a person derives income from both agricultural as well as business activities, only the market value of the agricultural produce would be considered as agricultural income.

For instance, if Mr. Ram were to use his land to grow fruits and manufacture fruit jam from the produce, the market value of the fruits used to make the jam would be considered as agricultural income, but not the income from actually selling jam.

However, caution needs to be exercised about applying this provision, as products such as tea, coffee and rubber have special provisions in tax laws.

Income from farm houses would be exempt, provided the building is situated within the immediate vicinity of the land which is used for agricultural purposes.

Farm houses..!

The building is used as a dwelling house or / store house and such land should either be assessed to land revenue or / situated outside urban area.

Here, urban area means any area situated within the jurisdiction of a municipality or cantonment board having a population of not less than 10,000 or / any area situated within certain specified distances (mentioned in the Act) from the local limits of any municipality or / cantonment board.

The urban area concept is relevant only in the case of income from farm house and not for other categories of agricultural income.

In the case of other categories, the income would be exempt even if the land is situated in urban area.

Hence, it is important to evaluate the above criteria every year to determine whether the land would qualify as urban land or / not.

If the location of Mr. Ram’s farm house falls within the above indicated limits or / is not assessed to land revenue, the income generated out of the farm house would be taxable.

Calculation..!

Although farm income which meets these conditions is exempt from tax, income tax is first calculated on the total taxable income, including net agricultural income.

Income tax is then calculated on the basic exemption amount increased by the net agricultural income.

The difference between the two is the tax payable on non-agricultural income.

About the author..!

Tapati Ghose is Partner and Amaranath Ambati is Manager, Deloitte Haskins & Sells LLP.

Share: