Basic Tax Exemption

• Agricultural income is generally exempt from income tax under Section 10(1) of the Income Tax Act.
  
• Income earned from agricultural land situated in India is not taxable.
  
• This exemption applies to individuals, HUFs, firms, and companies.
  
• The land must be classified as agricultural and used for genuine agricultural operations.
  
• Income must arise from sources like farming, harvesting, or cultivation.
  

Qualifying Activities as Agricultural Income

• Income from cultivation of land and sale of produce without processing beyond basic stages.
  
• Rent or revenue earned by letting out agricultural land.
  
• Income from nurseries growing and selling plants and seedlings.
  
• Sale of unprocessed crops like wheat, rice, vegetables, or fruits.
  
• Operations must be carried out on land situated in India.
  

Partial Taxation in Certain Cases (Tax Treatment Rule)

• Agricultural income is used for rate calculation in certain cases through the partial integration method.
  
• Applies if:
  
  • Net agricultural income exceeds ₹5,000, and
    
  • Non-agricultural income exceeds the basic exemption limit (₹2.5 lakh/₹3 lakh/₹5 lakh depending on age).
    
• Though the agricultural income itself is not taxed, it pushes the slab rate for other income higher.
  
• This method affects only individuals, HUFs, AOPs, and BOIs, not companies or firms.
  

Non-Qualifying Activities

• Income from agricultural land outside India is fully taxable.
  
• Income from sale of processed agricultural products (beyond basic operations) is partly taxable.
  
• Earnings from poultry farming, dairy farming, and floriculture in pots are not treated as agricultural income.
  
• Profits from agro-based industries or plantations may be treated as business income.
  
• Leased land used for non-agricultural purposes disqualifies the income.
  

Documentation and Reporting

• Agricultural income, even if exempt, must be disclosed in the income tax return if total income exceeds the taxable limit.
  
• Land records, crop sale bills, and receipts help establish the nature of income.
  
• Accurate classification helps avoid scrutiny or incorrect tax treatment.
  
• ITR-1 cannot be used if agricultural income exceeds ₹5,000; ITR-2 or higher must be used.
  
• Misreporting exempt income as taxable (or vice versa) can lead to notices or penalties.