Agricultural income outside India will be taxable in India

Under the India Income-tax law, agricultural income from land situated outside India will be taxable in India


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I am a citizen of Canada. My brother wants to purchase land here, in his own name, to practice farming. Income from agriculture is not taxed in India. But will his income in Canada be taxed in India? He believes that his taxability will remain nil even if he makes a profit from agriculture in Canada.

—Taranjit Singh

Under the India Income-tax law, agricultural income is defined to include income from agricultural land, buildings on or related to an agricultural land and commercial produce from an agricultural land “in India”. Agricultural income as defined above is exempt from tax in India subject to prescribed conditions. However, agricultural income from land situated in Canada will be taxable in India. It would be included under the head ‘Income from Profits and Gains of Business or Profession’, if it is carried on as a business activity and in any other case under the head ‘Income from Other Sources’.

In case agricultural income in India is the only source of income, then the entire income is exempt from tax. However, if the agricultural income exceeds Rs5,000 and the total income includes income from other heads such as salary, house property, business, or other sources, then the tax liability will be determined as per the following steps:

1(a) Compute total income including agricultural income and other sources of income.

1(b) Compute income tax (A) on the above total income as per the applicable income tax rates for the financial year.

2(a) Compute total income by adding agricultural income to the applicable basic exemption limit for the financial year.

2(b) Compute income tax (B) on the above aggregate income as per the applicable income tax rates for the financial year.

3. Income tax liability will be C = (A - B).

Under the Double Taxation Avoidance Agreement of India and Canada, taxes paid in Canada may be claimed as foreign tax credit in India against India income tax payable on doubly taxed income.

I have been living in Saudi Arabia for 18 years. I have an non-resident (external) (NRE) account in India. I have fixed deposits (FDs) by that account too. I am planning to come back to India permanently; how will the amount deposited in my NRE account and the term deposits be taxed?

—Younus Rabbani

The amount of balance in your NRE rupee account from the income earned and received in Saudi Arabia will not be taxable in India. Interest income from an NRE account (savings or fixed deposit) is exempt from tax in India provided the individual qualifies as a ‘person resident outside India’ under the exchange control law. The determination of residential status under the exchange control law is different from the income-tax law. An individual returning to India permanently becomes a ‘person resident in India’ under the exchange control law. On becoming a ‘person resident in India’ under the exchange control law, the onus is on the individual to notify the bank of the change in status from being a ‘person resident outside India’ to ‘person resident in India’ so that the NRE accounts are re-designated as resident accounts or the funds may be transferred to the resident foreign currency (RFC) account.

Interest income from RFC accounts is exempt from tax provided you qualify as a ‘resident but not ordinarily resident’ in India as per the income-tax laws. On becoming a ‘resident and ordinarily resident’ (which depends on the basis of physical presence in India in the last 10 financial years), interest income from all kinds of bank accounts will be taxable. However, interest income from resident savings and fixed deposit accounts will always be taxable. A deduction of up to Rs10,000 may be claimed for interest earned on savings bank account. Interest is taxable at progressive rates ranging from 10% to 30% (excluding surcharge and education cess). The maximum marginal rate is 35.535%.

You are required to file an Income-tax return and pay taxes in India only if your total taxable income exceeds Rs2.5 lakh.

Sonu Iyer is tax partner and people advisory services leader, EY India

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