Understanding Agricultural Income for Tax Purposes

You’re standing in a green field, seeds in hand and sun on your back. You harvest your crop, sell the produce, maybe rent out the land, and the question comes to mind: “What is agricultural income, exactly?” This isn’t just a farmer’s question; it matters for anyone who owns land, rents land, grows produce, or even manages farm-based income.

In this blog, we walk through what agricultural income means in India, how it is treated, what counts, what does not, and how the tax rules (or exemptions) apply.

What Is Agricultural Income?

Agricultural income is the revenue or rent you get from land used for farming (or similar operations). But under Indian law, it has a specific definition.

According to Section 2(1A) of the Income tax Act, “agricultural income” includes:

• Rent or revenue earned from land in India that is used for agricultural purposes.

• Income derived from the land by agricultural operations (including processes that make the produce market-ready) and the sale of the agricultural produce.

• Income from a building situated on or near agricultural land is considered agricultural income only if it is used for agricultural purposes, is directly connected with cultivation, and the land is subject to land revenue/agricultural assessment.

So, when you ask, “What is agricultural income?”, this is how we define it.

What Counts and What Does Not?

Let’s break this down simply:

Common examples that qualify as agricultural income:

• Rent received from agricultural land that's used for farming.

• Sale of crops grown on land (after basic processing) where the land was used for agriculture.

• Income from saplings or seedlings from a nursery grown on agricultural land.

Examples that may not qualify (or only partly qualify):

These activities do not automatically qualify as agricultural income because they are not directly derived from agricultural operations on land:

• Income from poultry farming, bee keeping, piggery, dairy farming, etc. These are treated as business income, unless the activity is inseparably connected with agricultural operations on the same land. In such cases, only the portion attributable to agricultural operations may qualify.

• Sale of processed agricultural goods that undergo substantial transformation beyond basic processing.

• For example, coffee that is grown and cured qualifies as agricultural income, but income from roasting and grinding may be treated as business income.

• Income from the land that is not agricultural land (for example, urban land) may not count.

Agricultural Income in India & Its Tax Treatment

Knowing what qualifies is only the first step; the tax rules are next.

The Income tax Act provides for the exemption of agricultural income under Section 10(1). That means, the agricultural income itself is exempt from tax.

However, there is a key caveat. If you have both agricultural income and non-agricultural income (for example, salary or business income), then the agricultural income may be used to determine the tax rate on the non-agricultural income (this is called the “partial integration” method).

For example, when an individual’s non-agricultural income exceeds the basic exemption limit (and agricultural income exceeds ₹5,000), the agricultural income is added for determining the applicable slab rate.

To understand more clearly, let’s assume:

• Agricultural income: ₹3,00,000

• Non-agricultural income: ₹4,00,000

• Basic exemption limit: ₹2,50,000 (for illustration)

Step 1: Add both incomes to determine the slab rate

Agricultural income (₹3,00,000) + Non-agricultural income (₹4,00,000) = Total = ₹7,00,000

The combined income places the taxpayer at a higher rate. Say 20%.

Step 2: Calculate tax on non-agricultural income

Since agricultural income is exempt, tax is calculated only on the non-agricultural income, but at the higher slab rate identified above.

So, non-agricultural taxable income = ₹4,00,000 – ₹2,50,000 =₹1,50,000

Step 3: Apply the slab rate determined earlier

20% of ₹1,50,000 = ₹30,000 tax payable

Also, agricultural income from land situated in India is eligible. If the land or revenue comes from another country, it may not qualify.

Why Correctly Classifying Agricultural Income Is Important?

Let’s imagine you’re renting out farmland, or you’ve inherited agricultural land and lease it to a farmer. Or maybe you invest in a nursery. In all these situations, understanding what agricultural income means helps you know whether that income is tax-exempt and whether you need to report it.

In practical terms:

• If you only have agricultural income (and no taxable non-agricultural income), you may have no tax to pay.

• If you combine agricultural income with business income or salary, then your agricultural income influences how much tax you pay (by influencing rate slabs).

• Improper classification of agricultural income can lead to scrutiny by the tax department.

Key Points to Keep in Mind

• The land used must be agricultural land. Under the Income tax Act, income is considered agricultural only if it comes from agricultural land located in India.

• The operations must be truly agricultural or fit within the defined processes (like tilling, sowing, harvesting, and basic processing). If there is substantial manufacturing or value addition, the income may be treated as business income instead.

• Even though agricultural income is exempt, you must disclose it in your income tax return if conditions apply (like if non-agricultural income is above the exemption limit).

• For tax planning, you need to treat agricultural income separately but be mindful of how it affects your overall tax liability.

A Practical Example

Meet Rahul, a 42-year-old farmland owner from Punjab.

“I own a piece of agricultural land, and I lease it out to a local farmer for ₹2,00,000 a year. The land is genuinely used for crop cultivation, so the rent I receive counts as agricultural income.

If this were my only source of income, I would not have to pay any tax on it. But I also earn a salary of ₹8,00,000 a year. In that case, my taxable income remains ₹8,00,000, but the agricultural income affects the tax rate applied to my salary under the special calculation method.”

So what benefit did he get from this?

Rahul still enjoys the advantage of not paying tax on the agricultural income itself.

This income provides him with consistent cash from his land without immediately changing his tax responsibilities.

In short, he makes more money each year, keeps his land useful, and holds on to the tax advantages that come with agricultural income as it's currently set up.

Final Reflection

So, when farm owners ask, “What is agricultural income?”, you’re asking about more than just harvesting crops. You’re asking about how revenue from land and basic farming operations is treated under the law. In the Indian context, agricultural income in India enjoys a special status under tax legislation. While it is often exempt, it still influences your broader tax picture if you have other income.

Whether you’re a farmer, land owner, investor in agricultural land, or simply someone trying to understand taxation in India, knowing this concept helps you stay informed and ready.

Open your Demat account with Kotak Neo and access a smooth, reliable platform to trade, invest, and manage your portfolio with confidence.

References

IndiaFilings
ClearTax
Kotak Life
Comptroller and Auditor General of India
taxupdates