Agricultural Income under the New Income-tax Law: Complete Explanation with Examples

Agricultural income has always enjoyed a privileged position under Indian income-tax law. The introduction of the new tax regime has not changed this exemption, but it has made correct understanding and reporting far more important.

Let’s break it down properly.

Legal Status of Agricultural Income

Agricultural income earned in India continues to be fully exempt from income tax under the Income-tax Act. This exemption applies regardless of whether a taxpayer opts for the old tax regime or the new tax regime.

However, exemption does not mean invisibility.

If a taxpayer has both agricultural and non-agricultural income, agricultural income may still influence the rate of tax applicable on taxable income. This is where most confusion begins.

Partial Integration: Where Agricultural Income Matters

Partial integration applies when:

Agricultural income exceeds ₹5,000, and

Non-agricultural income exceeds the basic exemption limit

In such cases, agricultural income is used only to determine the slab rate. Tax is ultimately charged only on non-agricultural income, but at a higher applicable rate.

This mechanism exists to prevent misuse of agricultural income exemption by high-income individuals.

What this really means is simple:
You don’t pay tax on agricultural income, but you also cannot use it to artificially stay in a lower slab.

What Qualifies as Agricultural Income

Only income that arises from actual cultivation of land qualifies as agricultural income. This includes:

Income from growing crops

Rent or revenue from agricultural land

Basic processing necessary to make produce marketable

Income from trading agricultural produce, cold storage operations, or advanced processing does not qualify and is treated as business income.

This distinction is critical and frequently examined during scrutiny assessments.

Reporting Agricultural Income in ITR

Agricultural income must be disclosed under the Exempt Income Schedule in the Income Tax Return.

Supporting documents should be maintained, including:

Land ownership or lease records

Crop details

Sale invoices

Bank statements reflecting receipts

Mismatch between bank credits and declared income is one of the most common triggers for notices.

Key Compliance Risks

Tax authorities closely scrutinize agricultural income claims where:

Income appears disproportionate to landholding

No clear evidence of cultivation exists

Agricultural income is repeatedly used to neutralize tax liability

Incorrect classification can lead to additions, penalties, and reopening of assessments.

Conclusion

Under the new income-tax law, agricultural income remains exempt, but not unquestioned. Correct classification, accurate reporting, and proper documentation are non-negotiable.

Agricultural income is a benefit provided by law, not a loophole to exploit. Taxpayers who understand this distinction stay compliant and avoid unnecessary litigation.

Written by:
Abhishek Gupta
Chartered Accountant
Office No. 19, Sagar Building, 4th Floor, Plot-327,
Narshi Natha Street, Masjid Bunder (West),
Mumbai – 400009
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