Agriculture has been the bread-earner for a major chunk of the Indian
population, however citing the pitiful conditions of farmers under British Rule,
the lawmakers decided to not tax their incomes. Although, after seven decades of
exemption from taxes, their conditions don't seem to uplift in any way, rather
an exploitation of such exemption is at upsurge. This paper attempts to analyse
the need for a robust taxation system for agricultural income and how should it
Income earned from the commercial production of agricultural land is known as
agricultural income, including income derived from farming land, buildings, and
commercial produce from horticulture land.
The statute defines agricultural income under Section 2(1A) of the Indian Income
Tax Act1 of 1961 as:
- Rent or any other revenue generated from agricultural land located in India
- Income generated from agrarian operations including processing of agricultural
- Income earned from a farmhouse if it satisfies specific conditions under section
- Income of a nursery is earned from seedlings or saplings.
Hence from the definition, we can conclude, income from the sale of replanted
trees or revenue from the sale of seeds, or payment received as rent for
agricultural land or money received from growing creepers & flowers or interest
earned by the partner of a firm on capital invested in agricultural operations
or profits generated by a partner from the company involved in agricultural
business operations, all fall under the purview of agricultural income.
How Is Agricultural Income Taxed?Exemption
Agricultural income is exempted from the purview of total income under Sec 10(1)
of the Income-tax Act, 1961.2 It reads:
"Incomes not included in total income: In computing the total income of a
previous year of any person, any income falling within any of the following
clauses shall not be included€” (1) agricultural income."
Proceeds from the sale or transfer of agricultural property were initially out
of the scope of total income as it came under agricultural income under Sec 2 of
the Act.3 The loophole is that the agricultural land does not come under the
definition of capital assets hence not taxed.
However, the precedence changed in 1970 with the Taxation Laws (Amendment) Act,
1970. The amendment changed the definition of "capital assets" and
retrospectively brought agricultural land situated in urban areas under the
ambit of "capital gains".
There are certain conditions provided in Sec 54(B)4 which states the exemptions
from capital gains.
The primary conditions are as follows:
- Availability of benefit under Section 54(B) is subject to the entity being an
individual or a HUF.
- Irrespective of whether the land is a long-term capital asset or a short-term
capital asset, the transferred asset should be agricultural land.
- Agricultural land to qualify under this provision should be used for
agricultural purposes by the individual or the parents at least for two years
immediately preceding the date of transfer.
- The taxpayer should acquire another agricultural land within two years from the
date of transfer of old land.
Partial Integration vis-a-vis The Finance Act, 2014
An indirect levy was brought to the taxation system of agricultural income in
the amendment of 20145, called "Partial Integration of Taxes". It provided for
primary three conditions, namely:
- The assessee is "an individual, a HUF, a body of individuals, an association or
an artificial juridical person".
- The taxpayer has income not coming under the purview of "agricultural income",
which exceeds the amount exempted.
- The agricultural income of the assessee is more than INR 5,000.
After the conditions mentioned above are satisfied, the scheme of partial
integration can be availed. In FY 2021-22, the exemption limit is INR 2,50,000.
However, a higher exemption limit is provided for super senior citizens, i.e.
INR 3,00,000 for those born- on or after April 2, 1941, but on or before April
1, 1961, and INR 5,00,000 for those born- on or before April 1, 1941.
However, these tax exemption originally meant for the benefit of the
agricultural sector has been abused heavily in last few decades. The shreds of
evidence can be found in the audit findings of the Comptroller and Auditor
General (hereafter referred to as CAG) in 2019.
What Did CAG's 2019 Audit Find?
The ever-suspected exploitation of exemption of taxes got confirmed in the 2019
CAG report.6 In its report, CAG explained that it had reviewed 6,778 cases out
of 22,195 scrutiny assessments carried out by ITD between FY15-FY17 for those
assesses who had claimed above Rs. 5,00,000 in agricultural income. A total of
Rs 3,656.25 was claimed as agricultural income in those 6,778 cases alone, and
to our surprise, Rs 2,544.21 was allowed too. Out of the total claims made, 57%
of the claims were of companies.
The shocking assertions of the report were that out of the total cases reviewed,
claims of 22.5% exemption cases were allowed without any examination or
verification of supporting documents. The documents usually were essential, such
as income statements, proof of agricultural income, land records, and crop
information. The CAG was of the view that there is no clarity on the assessment
process by the officers-in-charge and how they were ensuring that the exemption
was allowed for only the eligible assesses who had genuine claims.
Rationale Behind Exemption
What does the Constitution say?
The Constitution of India has provided two entries governing the rules around
taxation on agricultural income.
In Entry 82 of the Union List7, it mentions that the Constitution empowers the
Union Parliament to legislate on "taxes on income other than agricultural
Whereas in Entry 46 of the State List, it is mentioned that the States are
entitled exclusively to legislate on "taxes on agricultural income".
These provisions give no sign of historical reasons due to which the
agricultural income is not being put under the purview of taxation under the
Act. However, a not-so-deep study can also find the plight of farmers in the
colonial era when they were subjected to heavy taxes. Since the significant
chunk of India's population was sustained on agriculture only, the step to
exempt agricultural income from taxation was taken to correct the wrongs done to
Hurdles to taxing the agrarian income are innumerable. States like Assam, Bihar,
Kerala, and Karnataka, have used their power according to Entry 46 of the State
List to implement a taxation structure; however, it is very arbitrary.
Reasons could be:
Taxation is a costly process involving a hefty financial resource, and it is
believed that the worth of tax collected will not match this amount.
Farmers even today are very much illiterate to calculate their taxes. Moreover,
the calculation in itself is very dicey as it involves several factors that are
even arbitrary sometimes.
Taxing of the produce would be calculated for the subsequent year. It would be
challenging to define tax slabs because of disproportionate and non-uniform
relations between land-holdings and produce.
Taxing the agricultural income would defeat the spirit of federalism mentioned
in the Constitution as it has already provided provisions for its taxation by
States; hence it cannot be brought under the Central Tax structure.
The upholding of this exemption even after seventy years of exemption is largely
due to the foul play of politicians. In some way or the other, these exemptions
contribute to their vote bank, and hence they do not dare to revoke the same.
The politicians argue that the wounds of the colonial era, which heavily taxed
the agricultural sector, are still fresh, and any such step to disown the
exemption policy will be as unjust as it was then. A downright rejection of such
laws by the wealthy landowner and pressure groups parallelly contribute to the
The country has seen many parties, ideologies, and personalities coming to power
to frame policies for the nation, but none have dared to bring agricultural
income under the purview of taxation. Politicians are allegedly benefitted from
such exemptions as it acts as a buttress for the black money rackets by
providing foolproof means to circumvent the taxes. All these factors combined
have resulted in the prolonged continuation of exemption of taxation on
The Required Legal Framework
Tax evasion at the moment is a child's game as it barely ensures the legitimacy
of a claim. Hence, a rule to make tax evasion consistently tricky can be made
under which it should be mandatory for all individuals, who disclose
agricultural income over, say, Rs 20 lakh (the limit for family Rs 40 lakh) to
provide the following information in their income-tax returns:
- the break-up of agricultural income into sale value of produce
- rent from land and farmhouse;
- acres of agricultural land owned and leased with location crops grown,
yield, and sale realisation per acre;
- and details of fertiliser, seeds, and pesticides purchased.
The land ceiling act of every state will come in handy to ascertain whether the
assessee who is filing the income-tax returns is showing income from more land
than prescribed under the Act or not.
Those assessees selected from the above criteria should be asked to file returns
in a separate section observed by officers from a farming background who would
better understand agricultural operations. Based on the officer's observations,
if he rules that the income shown as agricultural income is disproportionate to
the details declared, then the difference could be included under a separate
head and taxed at 60%.
Corruption is human nature but not a machine. So to rule out the possibility of
corruption, the interface should be less human and more technical, such as
email. Further, Section 2 (1A) of the IT Act should be amended to exclude
agricultural income rent received from letting out a farm.
Another measure can be categorising of individuals seeking exemption in their
income-tax returns. Individuals can be broadly categorised into three domains: a
farmer, a professional with an agricultural income, and a public servant
disclosing agricultural income. For this categorisation, we first need the
definition of a farmer to be included in the IT Act.
The taxation policy can exempt a person from earning only through agricultural
means to a specific ceiling limit. However, the other two categories of person,
namely any professional or public servant disclosing agricultural income, should
be taxed at regular rates. This will ensure that only the marginalised farmers
dependent on their agricultural produce should benefit and not wealthy
businessmen or politicians.
- The Income- Tax Act, 1995, § 2(1A), No. 43, Acts of Parliament, 1995
- The Income- Tax Act, 1995, § 10(1), No. 43, Acts of Parliament, 1995
- The Income- Tax Act, 1995, § 2, No. 43, Acts of Parliament, 1995 (India)
- The Taxation Laws (Amendment) Act, 1970, § 54(B), No. 42, Acts of
Parliament, 1970 (India).
- The Finance Act, 2014.
- Comptroller and Auditor General of India, Assessments Relating to
Agricultural Income Report No. 9 of 2019 (Direct Taxes) [Accessed 2 July
- Entry 82, Seventh Schedule, List-I, Constitution of India, 1947
- Entry 46, Seventh Schedule, List-II, Constitution of India, 1947