Illustrations on Impact of Agricultural income on Tax Computation
by Agricultural income is generally exempt from tax. However, in certain cases, it is considered for rate purposes through the method known as partial integration of agricultural income. This method does not directly tax agricultural income. Instead, it may increase the rate applicable to the taxpayer’s taxable non agricultural income. The following illustrations explain the practical impact of agricultural income on tax computation.
Illustration 1: Agricultural Income Below Basic Exemption Limit
Mr. A has the following income:
Non agricultural income = ₹4,00,000
Agricultural income = ₹1,50,000
Assume the applicable basic exemption limit is ₹4,00,000 and the conditions for partial integration are not satisfied.
Solution
Agricultural income is generally exempt.
Since the non agricultural income does not exceed the basic exemption limit, the agricultural income will not be considered for partial integration.
Taxable non agricultural income = ₹4,00,000
Therefore, the agricultural income of ₹1,50,000 does not create any additional tax liability.
Illustration 2: Agricultural Income Exceeds Basic Exemption Limit
Mr. B has:
Non agricultural income = ₹8,00,000
Agricultural income = ₹2,00,000
Assume the basic exemption limit is ₹4,00,000 and other conditions for partial integration are satisfied.
Solution
Agricultural income remains exempt.
However, for rate purposes, the tax is determined using the partial integration method.
Step 1: Tax on ₹10,00,000
Non agricultural income + Agricultural income
₹8,00,000 + ₹2,00,000 = ₹10,00,000
Tax is calculated on ₹10,00,000 according to the applicable slab rates.
Step 2: Tax on ₹6,00,000
Agricultural income is added to the basic exemption limit:
₹4,00,000 + ₹2,00,000 = ₹6,00,000
Tax is calculated on ₹6,00,000.
Step 3: Difference
Tax on ₹10,00,000
Less: Tax on ₹6,00,000
= Tax attributable to non agricultural income
Thus, agricultural income affects the rate calculation, but is not itself directly taxed.
Illustration 3: High Agricultural Income with Taxable Business Income
Mr. C earns:
Business income = ₹12,00,000
Agricultural income = ₹5,00,000
Assume the basic exemption limit is ₹4,00,000 and the conditions for partial integration are satisfied.
Solution
Agricultural income of ₹5,00,000 is exempt.
For rate purposes:
Step 1
₹12,00,000 + ₹5,00,000
= ₹17,00,000
Tax is calculated on ₹17,00,000.
Step 2
₹5,00,000 + ₹4,00,000
= ₹9,00,000
Tax is calculated on ₹9,00,000.
Step 3
Tax on ₹17,00,000
Less: Tax on ₹9,00,000
= Tax payable before applicable rebate, surcharge and cess
Therefore, agricultural income increases the effective rate applicable to the taxable business income without becoming taxable itself.
Illustration 4: Agricultural Income and Salary Income
Mr. D receives:
Salary income = ₹10,00,000
Agricultural income = ₹3,00,000
Assume the conditions for partial integration are satisfied.
Solution
Agricultural income = ₹3,00,000
This amount is generally exempt.
For rate purposes:
Step 1
₹10,00,000 + ₹3,00,000
= ₹13,00,000
Step 2
₹3,00,000 + ₹4,00,000
= ₹7,00,000
Tax is determined by comparing the tax on ₹13,00,000 with the tax on ₹7,00,000.
Therefore, the agricultural income may increase the tax rate applicable to salary income, although the ₹3,00,000 agricultural income itself is not directly taxed.
Illustration 5: Agricultural Income from Tea Business
Mr. E earns a composite income of ₹10,00,000 from growing and manufacturing tea in India.
For tea growing and manufacturing:
60% = Agricultural income
40% = Non agricultural income
Solution
Agricultural portion:
₹10,00,000 × 60%
= ₹6,00,000
Non agricultural portion:
₹10,00,000 × 40%
= ₹4,00,000
Therefore:
Agricultural income = ₹6,00,000
Taxable non agricultural income = ₹4,00,000
The ₹6,00,000 agricultural portion is generally exempt, while the ₹4,00,000 non agricultural portion is considered for taxation.
Illustration 6: Agricultural Income from Rubber Business
Mr. F earns ₹8,00,000 from growing and manufacturing rubber in India.
The prescribed division is:
65% Agricultural income
35% Non agricultural income
Solution
Agricultural income:
₹8,00,000 × 65%
= ₹5,20,000
Non agricultural income:
₹8,00,000 × 35%
= ₹2,80,000
Thus, ₹5,20,000 is treated as agricultural income and ₹2,80,000 is taxable as non agricultural income, subject to the applicable provisions.
Illustration 7: Agricultural Income from Coffee
Mr. G earns ₹12,00,000 from growing and curing coffee.
Prescribed allocation:
75% Agricultural income
25% Non agricultural income
Solution
Agricultural income:
₹12,00,000 × 75%
= ₹9,00,000
Non agricultural income:
₹12,00,000 × 25%
= ₹3,00,000
Therefore:
Exempt agricultural portion = ₹9,00,000
Taxable non agricultural portion = ₹3,00,000
Illustration 8: Main Impact of Agricultural Income
Suppose an assessee has:
Non agricultural income = ₹9,00,000
Agricultural income = ₹4,00,000
The agricultural income is not directly added to taxable income. However, where the conditions for partial integration are satisfied, it is considered along with non agricultural income for determining the applicable rate.
Therefore:
Agricultural income → Generally exempt
Non agricultural income → Taxable
Agricultural income → May affect rate of tax through partial integration