Taxation of Agricultural Income – What’s Exempt and What’s Not?
Introduction
Agriculture has been the backbone of India’s economy for decades. Recognizing its importance, the Indian government provides tax exemptions on agricultural income under the Income Tax Act. However, not all income earned by farmers or landowners qualifies for exemption.
In this detailed guide, Makwana Sweta & Associates, a reputed CA in Mumbai, explains the rules, exceptions, grey areas, and recent updates on taxation of agricultural income in India (FY 2025-26).
What is Agricultural Income?
As per Section 2(1A) of the Income Tax Act, agricultural income includes:
- Income from rent or revenue derived from land in India used for agricultural purposes.
- Income from agricultural operations, such as sowing, harvesting, and cultivation.
- Income from processing agricultural produce to make it market-ready (e.g., drying, shelling, etc.).
- Income from farmhouses situated on or near agricultural land under certain conditions.
What Income is Exempt?
Under Section 10(1) of the Income Tax Act, agricultural income is exempt from tax, provided:
- The land is situated in India.
- It is used for agricultural purposes.
- Income is derived directly from such land.
Examples of Exempt Income:
- Profits from growing wheat, rice, cotton, or sugarcane on Indian land.
- Income from renting out agricultural land.
- Income from farmhouses used for agricultural activities.
When Agricultural Income Becomes Taxable
While pure agricultural income is exempt, the following scenarios may lead to taxation:
| Situation | Taxable? |
|---|---|
| Agricultural land outside India | ✅ Yes |
| Income from trading agricultural products | ✅ Yes |
| Processing beyond basic preparation (e.g., making jams) | ✅ Yes |
| Contract farming with non-agri components | ✅ Yes |
| Leasing agri land for non-agri use | ✅ Yes |
| Income from dairy/poultry/fishery | ✅ Yes (Not agricultural income) |
Key Transition: If the activity goes beyond traditional farming into processing or commercialisation, it may attract tax.
Partial Taxability: The “Aggregation Rule”
If your agricultural income exceeds ₹5,000 and you have other taxable income above the basic exemption limit, the aggregation method applies.
Here’s how:
- Add agricultural income to non-agricultural income.
- Compute tax on total income.
- Deduct tax computed on agri income + exemption limit.
- The difference is the actual tax liability.
Example (FY 2025-26 Rates):
- Agri Income: ₹3,00,000
- Other Income: ₹7,00,000
→ Aggregation rule applies. Tax is calculated accordingly.
Income That Is Not Agricultural (But Often Mistaken)
| Activity | Tax Status |
|---|---|
| Poultry farming | Non-agricultural |
| Dairy business | Non-agricultural |
| Floriculture in commercial nurseries | May be taxable |
| Sale of processed items (e.g., pickles, jams) | Taxable |
| Income from agricultural land leased to telecom towers | Taxable |
Always consult a Chartered Accountant in Mumbai or your local jurisdiction to classify income correctly.
Required Documents to Prove Agricultural Income
To ensure the exempt status, you should maintain:
- Land ownership/title documents
- Proof of cultivation (e.g., photos, invoices)
- Sale receipts of produce
- Lease agreements (if applicable)
- Bank statements for agri transactions
Judicial Precedents and Case Law Insights
- Raja Benoy Kumar Sahas Roy (1957) – Landmark case that defined agricultural income.
- CIT vs Raja Shamsher Singh (1965) – Rent from non-cultivated land is not exempt.
- Latest Trends: Courts now scrutinize agri income in high-income filings; IT Department uses AI tools to flag fake agri claims.
Recent Budget Updates (2025)
- Increased scrutiny on agricultural income in ITRs with high-value transactions.
- New AIS (Annual Information Statement) tracking large land-related transactions.
- Tighter guidelines for farmhouses claiming exemption.
Important Note: As per Budget 2025, there is no change in exemption rules but enforcement is stricter.
Who Should Pay Special Attention?
- HNIs showing agri income as major source
- Corporates with agri subsidiaries
- Investors in agri-tech and contract farming
- Landowners in urbanising zones
- Agribusinesses mixing trading + farming
Best Practices to Remain Compliant
- Keep all records of farming activity
- Avoid mixing business and agricultural accounts
- Don’t misuse agricultural land to evade taxes
- File ITR 2 or ITR 3 properly reflecting agri income
- Consult a CA in Mumbai with agricultural tax experience
Conclusion
Agricultural income is not a blanket exemption. Understanding the fine line between exempt and taxable is critical for farmers, agribusiness owners, and investors. If you want peace of mind and full compliance, let Makwana Sweta & Associates, your trusted Tax Consultants in Mumbai, help you with personalised tax advisory and filing.