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Agricultural income taxable under certain conditions

If agricultural income is not covered under section 2(1A), a separate evaluation would be needed

I am a salaried person but I also have additional income from a piece of agricultural land that I own. How should I compute tax and show the income while filing returns?

—Jatin Srivastava

We have assumed that the income earned by you from the agricultural land is covered under section 2(1A) of the Income-tax Act and accordingly exempt from tax under section 10.

However, for the limited purpose of determining the tax rate, while calculating tax liability for the financial year (FY), you would be required to include the agricultural income in the total income provided the following two conditions are cumulatively satisfied:

1. Net aggregate agricultural income during financial year 2015 (FY15) exceeds 5,000 (otherwise the entire agricultural shall not be included for rate purpose); and

2. Total income, excluding net agricultural income, exceeds applicable basic income exemption, i.e., 2.5 lakh for FY15.

The basic income exemption for an individual of age between 60 and 80 years is 3 lakh for FY15. Further, the basic exemption for an individual above 80 years of age is 5 lakh.

For easy understanding, the steps for computing tax liability for FY15 have been outlined below, assuming your age is below 60 years.

Step 1: Let’s say your total income of 12 lakh comprises net agricultural income of 1 lakh and salary income of 11 lakh. Accordingly, basic tax on the aggregate income of 12 lakh shall amount to 1.85 lakh.

Step 2: Add the applicable basic tax slab benefit, i.e., 2.5 lakh to the net agricultural income. Accordingly, in this case, the total income shall be 3.5 lakh (i.e. 2.5 lakh plus 1 lakh). So, the tax amount would work out to 10,000.

Step 3: Subtract the tax computed at step 2 from the tax computed at step 1 (1.85 lakh minus 10,000), i.e., 1.75 lakh. Accordingly, the net basic tax would be 1.75 lakh.

If total taxable income during FY15 exceeds 1 crore, surcharge at 10% on basic rate should be applied. Education cess should be applied on basic tax rate and surcharge, if applicable.

If agricultural income is not covered under section 2(1A), a separate evaluation would be needed.

If your aggregate agricultural income is up to 5,000 during FY15, then the entire income shall be exempt from tax. Accordingly, you need to disclose the agricultural income in the income tax return (ITR) 1 form to be compliant from the disclosure perspective. But if the agricultural income exceeds 5,000, then form ITR 2 applies, which has a separate column for disclosure of agricultural income.

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