Farmers

Agriculture is the backbone of the Indian economy, and farmers play a vital role in sustaining the nation's food security and rural development. Recognising the importance of the agricultural sector, the Income Tax Act, 1961 provides a range of exemptions, deductions, and special provisions specifically designed to benefit farmers and individuals engaged in agricultural activities.

This document comprehensively presents the special tax benefits, exemptions, and compliance requirements available to individual farmers and persons engaged in agricultural activities under the Income-tax Act, 1961.

Residential Status

Determining the residential status of farmers is an essential aspect of computing their taxable income under the Income-tax Act, 1961. Section 6 of the Act lays down the criteria for determining the residential status of an assessee.

For an individual assessee, the residential status during a previous year can be classified as:
(a) Resident in India, or
(b) Non-Resident in India

If an individual is classified as a resident in India, they are further categorised into:
(a) Resident and Ordinarily Resident (ROR), or
(b) Resident but Not Ordinarily Resident (RNOR)

Resident in India

An individual is said to be resident in India in any previous year, if he stays in India for:

(a) 182 days or more during the relevant previous year; or

(b) 60 days or more (but less than 182 days) during the relevant previous year and for 365 days or more in the last 4 years.

The condition (b) is modified in case of an Indian citizen or a person of Indian Origin in the following circumstances.

Exception 1: '60 days' to be replaced with '182 days'

The condition (b) is substituted with the condition of stay in India for 182 days during the current year and for 365 days or more in the last 4 years if the individual falls in any of the following categories:

• An Indian citizen who, being outside India, comes on a visit to India during the previous year and his total Indian income in that year does not exceed Rs. 15 lakh;

• Person of Indian Origin who, being outside India, comes on a visit to India during the previous year and his total Indian income in that year does not exceed Rs. 15 lakh;

• An Indian citizen who leaves India during the previous year for the purpose of employment; or

• An Indian citizen who leaves India during the previous year as a crew member of an Indian Ship.

Note 1: A person is deemed to be of Indian Origin if he, or either of his parents or any of his grandparents, was born in undivided India. It may be noted that grandparents include both maternal and paternal grandparents.

Note 2: Total Indian income means total income excluding the income from foreign sources. Further, “income from foreign sources” means income that accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India

Exception 2: '60 days' to be replaced with '120 days'

Exception 2: '60 days' to be replaced with '120 days'The condition (b) is substituted with the condition of stay in India for 120 days or more but less than 182 days during the current year and for 365 days or more in the last 4 years if the individual falls in any of the following categories:

(a) The Indian citizen who, being outside India, comes on a visit to India during the previous year and his total Indian income in that year exceeds Rs. 15 lakhs;

(b) A person of Indian origin who, being outside India, comes on a visit to India during the previous year, and his total Indian income in that year exceeded Rs. 15 lakhs.

The individual, in this situation, is deemed as Not Ordinarily Resident in India.

Non-Resident in India

If a person does not satisfy any of the above conditions for being a resident of India, he is considered a Non-Resident for that year.

Deemed Resident

An individual who is treated as a non-resident in India on the basis of his stay in India is still deemed a resident in India if he satisfies the following conditions:

(a) He is a citizen of India.

(b) His total Indian income exceeds Rs. 15 lakhs during the relevant previous year; and

(c) He is not liable to tax in any other country or territory because of his domicile, residence, or other criteria of a similar nature.

An individual who is deemed as a resident in India as per the aforesaid provision is treated as ‘Not Ordinarily Resident’ in India irrespective of his stay in India in the preceding years.

Not Ordinarily Resident

An individual is said to be ‘Not Ordinarily Resident (NOR)’ in India in any previous year in the following cases:

Non-resident in India in 9 out of 10 preceding years

An individual, being a resident in India, will be treated as a Not Ordinarily Resident (NOR) in India if he has been a non-resident in India for at least 9 out of 10 years immediately preceding the relevant previous year.

Stays in India for 729 days or less in last 7 years

An individual, being a resident in India, will be treated as a Not Ordinarily Resident (NOR) in India if he has been in India for 729 days or less during the period of 7 years immediately preceding the previous year.

Deemed Resident

An individual who is deemed as a resident in India (as referred to in Para 2.3) is treated as Not Ordinarily Resident in India

Indian Income exceeding Rs. 15 lakhs

An individual shall be deemed as Not Ordinarily Resident in India if the following conditions are satisfied:

• He is an Indian Citizen or a person of Indian origin who stays outside India;

• He comes on a visit to India in any previous year,

• His total Indian income during that year exceeds Rs. 15 lakhs; and

• His stay in India is for 120 days or more (but less than 182 days) during the relevant previous year and for a period of 365 days or more in last 4 years.

Relevant Definitions

Agriculture Income

Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income means:

(a) Any rent or revenue derived from land situated in India is used for agricultural purposes.

(b) Any income derived from such land by agriculture or the processing of agricultural produce to render it fit for the market or sale of such produce.

(c) Any income attributable to a farm house, subject to the satisfaction of certain conditions specified in this regard in section 2(1A).

Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Capital Assets

The term 'capital asset' has been defined in Section 2(14) of the Income-tax Act. It means:

(a) Any kind of property held by an assessee, whether or not connected with the business or profession of the assessee.

(b) Any securities held by an FII that has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

(c) Any securities held by a Category I or Category II AIF that has invested in such securities in accordance with the SEBI or IFSC Regulations.

(d) Any ULIP to which the exemption under Section 10(10D) does not apply.

However, the following items are excluded from the definition of “capital asset”:

(a) Any stock-in-trade (other than securities referred to in (b) and (c) above), consumable stores or raw materials held for the purposes of business or profession;

(b) Personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any family member dependent on him, but excludes certain assets, like jewellery, artistic works, etc.

(c) Agricultural Land in India, not being a land situated:

• Within the jurisdiction of the municipality, a notified area committee, a town area committee, or a cantonment board, which has a population of not less than 10,000;

• Within the range of the following distance measured aerially from the local limits of any municipality or cantonment board:

i. not being more than 2 KMs, if the population of such an area is more than 10,000 but not exceeding 1 lakh;

ii. not being more than 6 KMs, if the population of such an area is more than 1 lakh but not exceeding 10 lakhs; or

iii. not being more than 8 KMs, if the population of such an area is more than 10 lakhs.

Population is to be considered according to the figures of the last preceding census, of which relevant figures have been published before the first day of the year;

(d) 6.5 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;

(e) Special Bearer Bonds, 1991 issued by the Central Government;

(f) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015, notified by the Central Government.

Profits and Gains from Business and Profession

Where a farmer is earning business income, all provisions relating to Profits and Gains from Business or Profession under the Income-tax Act are generally applicable to him in the same manner as they apply to any other assessee. However, a special provision under Section 33AB provides specific benefits to farmers or persons engaged in the business of growing and manufacturing tea, coffee, or rubber in India. The details of this special provision are discussed below.

Section 33AB

A farmer engaged in the business of growing and manufacturing tea, coffee, or rubber in India is eligible for a deduction under Section 33AB of the Income Tax Act, subject to certain conditions. To claim the deduction, the farmer must deposit an amount within:

• 6 months from the end of the previous year, or

• Before the due date of furnishing the return of income under Section 139(1),
whichever is earlier, in the specified accounts mentioned below.

Specified Accounts

The deposit must be made in either of the following:

(a) A Special Account maintained with NABARD, under a scheme approved by the Tea Board, Coffee Board, or Rubber Board, or

(b) A Deposit Account under any scheme framed by the Tea Board, Coffee Board, or Rubber Board, and approved by the Central Government.

Amount of deduction

The deduction shall be the lower of the following:

(a) The amount actually deposited in the specified account(s), or

(b) 40% of the profits derived from the business (computed under the head of "Profits and Gains of Business or Profession" before this deduction).

Such deduction is allowed before deducting carried forward business losses under Section 72.

Notes: Where the amount deposited has been allowed as a deduction in any previous year, no deduction shall be allowed with respect to such amount in any other previous year. Similarly, where the amount standing in the credit of the special account or the Deposit account is utilised by the assessee for an expenditure in accordance with the scheme, such expenditure shall not be allowed as a deduction in computing the business income.

Audit Requirement

To claim this deduction, the assessee is required to get his accounts audited by a Chartered Accountant as referred to under section 288(2) and furnish the report of such audit electronically in Form 3AC within one month before the due date of furnishing the return of income under section 139(1). The audit shall not be mandatory if accounts are required to be audited under any other law, and the audit report as per that law is obtained along with a report in Form 3AC for the purposes of this provision.

When can amounts be withdrawn from specified accounts?

The amount standing to the credit of the special or deposit account can be withdrawn for the purposes specified in the scheme. In addition, the farmer is allowed to withdraw the deposit in case of business closure or the death of the assessee.

Withdrawal of deduction

• In case of the closure of the business

If a deposit is withdrawn upon the closure of a business, the amount so withdrawn is chargeable to tax as business income of that previous year. However, if the amount is withdrawn in the event of the assessee's death, the deduction shall not be withdrawn, and nothing would be taxable in the hands of the recipient.

• Use for non-permitted purposes

If the deposit is utilised for the purchase of the following machinery and plant, the amount so utilised shall be deemed to be business profits of that previous year:

(a) Any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest house

(b) Any office appliances (not being computers)

(c) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the business income

(d) Any new machinery or plant to be installed in an industrial undertaking for the construction, manufacture or production of any article or thing specified in the Eleventh Schedule.

• Amount remains unutilised

The amount of deposit withdrawn by the assessee from the deposit account or released by NABARD from the special account should be utilised in accordance with the relevant scheme in the said previous year. If it is not so utilised, the unutilised amount is deemed to be business income of that previous year. However, no taxability will arise if such sum is withdrawn or released, as the case may be, in case of death of the assessee, Partition of HUF or Liquidation of a company.

• Sale of assets within 8 years

If any asset, acquired under the relevant scheme, is sold or otherwise transferred within 8 years from the end of the previous year in which it was acquired, the proportionate amount of deduction relatable to the cost of such asset is deemed to be business income of that previous year. The deduction to be withdrawn shall be calculated as under:

The deduction is not withdrawn if the asset is transferred, within 8 years, to the government, a local authority, a statutory corporation or a government company.

Calculation of Total Income

The computation of total income and tax liability generally follows a standard procedure under the Income Tax Act. However, a special tax calculation method is applied when an assessee has agricultural income in addition to non-agricultural income. This method is known as Partial Integration of Agricultural Income and is discussed in detail below.

Partial integration of agricultural income

As per Section 10(1) of the Income-tax Act, agricultural income is exempt from tax in the hands of an assessee. However, it is included in the total income of a specified assessee where agricultural income exceeds Rs. 5,000 and the non-agricultural income exceeds the maximum exemption limit. This scheme is called the partial integration of non-agricultural income with agricultural income. Such partial integration is done if the following conditions are satisfied:

(a) Taxpayer is an individual, HUF, BOI, AOP or an Artificial Juridical Person;

(b) The taxpayer has non-agricultural income exceeding the maximum exemption limit; and

(c) The agricultural income of the taxpayer exceeds Rs. 5,000.

Method of Partial Integration

The manner of tax calculation in the case of the partial integration regime is as follows:

Step 1: Calculate net agricultural income. (Discussed in next para)

Step 2: Calculate tax on the aggregate of the non-agricultural total income and net agricultural income, as if such income were the total income.

Step 3: Calculate tax on the aggregate of net agricultural income and the maximum exemption limit as if such income were the total income.

Step 4: The amount of tax calculated in Step 2 shall be reduced by the amount of tax calculated in Step 3.

Step 5: The result of Step 4 shall be reduced by rebate under Section 87A, if applicable. The resultant figure shall be increased by surcharge and health & education cess.

Step 6: The amount arrived in Step 5 is the final tax liability payable by the assessee.

Calculation of agricultural income for partial integration

For the purpose of computing tax in accordance with the partial integration regime, the net agricultural income will be computed in accordance with the Rules prescribed in Part IV of the First Schedule to the Finance Act.

• Rent or revenue derived from land

Agriculture income of the nature referred to in Section 2(1A)(a), i.e., any rent or revenue derived from land which is situated in India and is used for agricultural purposes, shall be computed on the same basis as is adopted for computation of income under the head 'Income from Other Sources'. However, while determining the expenditures which are not allowable as deduction, expenditures referred to under Section 40A(3)/(3A)/4 shall not be disallowed.

• Any income derived through agriculture from land

Agriculture income of the nature referred to in Section 2(1A)(b), i.e., any income derived by agriculture from land situated in India or from any process, shall be computed as if it were income chargeable to tax under the head 'Profits and gains of business or profession'. However, while determining the expenditures which are not allowable as deduction, expenditures referred to under section 40A(3)/(3A)/4 shall not be disallowed.

• Income from farm building

Agriculture income of the nature referred to in Section 2(1A)(c), i.e., income from a farm building required as a dwelling house, shall be computed as if it were income chargeable to tax under the head 'Income from house properties’.

• Partly agricultural and partly business income

Where an entity carries both agricultural and non-agricultural activities, the profits arising from the business shall be both agricultural income and non-agricultural income. In such a situation, the income from agricultural operation is computed on a presumptive basis.

• Income of a member of AOP or BOI

Where an assessee is a member of an AOP or BOI (other than an HUF, company or firm) which in the previous year has either no income chargeable to tax or has non-agricultural income not exceeding the taxable amount but has any agricultural income, then the agricultural income or loss is computed in accordance with these rules and the share of the assessee in the agricultural income or loss so computed is regarded as his agricultural income or loss.

• Set-off of loss from agricultural operation

Any loss incurred in agriculture is allowed to be set off against any other source of agricultural income during the same year. A member of AOP or BOI cannot set off his share of agricultural loss from AOP or BOI against his agricultural income.

• Carry forward of agriculture loss

Any unabsorbed agricultural loss can be carried forward and set off only against agricultural income within the prescribed time limit of 8 years. However, where the agricultural business of the assessee is succeeded, otherwise than by inheritance, set off of losses shall be allowed to the person who has incurred such losses only.

• Loss from agriculture operation

If the net result of computation of agricultural income is a loss, it is to be disregarded and agricultural income is taken as nil. An agricultural income is aggregated for the purpose of determining the rate of income-tax only if it is in excess of Rs 5,000, net agricultural loss shall be ignored for the purpose of aggregation while determining such rates.

• Rounding off of agriculture income

The net agricultural income is rounded off to the nearest multiple of Rs. 10.

Capital Gains

Farmers are subject to capital gains tax provisions like any other assessee, but they enjoy certain special benefits, particularly in cases involving agricultural land or reinvestment of gains.

Section 45: Charging section of capital gain

Section 45 of the Income-tax Act is the charging provision for capital gains, stating that any profit or gain arising from transfer of a capital asset is deemed to be the income of the previous year in which such transfer took place. The capital gain is computed as per provisions of Section 48 which is further reduced by the exemptions provided for reinvestment of capital gains or sale consideration.

Section 2(14): Rural agricultural land is not a capital asset

As per Section 2(14) of the Income-tax Act, 'capital asset' does not include rural agricultural land in India (see Para 1.2). Accordingly, since rural agricultural land is not treated as a capital asset, its transfer does not attract capital gains tax. Therefore, if a farmer sells rural agricultural land, the gain arising from such transfer is not chargeable to tax under the head "Capital Gains."

Section 10(37): Capital gains on compulsory acquisition of urban agricultural land

As discussed above, rural agricultural land is out of the scope of capital assets. Thus, any profit arising from the sale of rural agricultural land is not chargeable to tax under the head of capital gains. However, if any capital gain arises from the transfer of urban agriculture land, it shall be exempt from tax if the following conditions are satisfied:

(a) Such land is owned by an Individual or HUF;

(b) Such HUF or the individual (or any of his parent) has used the land for agricultural purposes for 2 years prior to the date of transfer;

(c) The land is transferred by way of compulsory acquisition under any law, or the consideration for its transfer should be determined or approved by the Central Government or the RBI; and

(d) Income has arisen from such compensation or consideration (including enhanced compensation), and it should be received on or after 01-04-2004.

Section 54B: Capital gain exemption under Section 54B

The capital gain is exempt under Section 10(37) if agricultural land is compulsorily acquired. If the land is transferred otherwise, exemption can be claimed under Section 54B, subject to reinvestment in agricultural land and its use for agricultural purposes in the two years preceding the transfer.

Section 54B provides an exemption to individuals and HUFs in respect of capital gain arising from the transfer of agricultural land. The exemption is allowed if the amount of capital gain is further invested in the purchase of new agricultural land. The provision requires that the land must be used for agricultural purposes by the assessee himself or his parent or by the HUF, as the case may be, at least for a period of 2 years before the date of transfer. Thus, the exemption is denied if land is used for less than 2 years for agricultural purposes.

• Acquired a new asset for Section 54B exemption

The exemption is allowed if the assessee purchases the agricultural land within 2 years after the date of the transfer.

• Time limit to invest in agricultural land

The assessee has to purchase the agricultural land within 2 years after the date of transfer of the original asset.

• Time limit to deposit in the capital gain account scheme

In cases where the assessee is unable to utilise the capital gains for the purchase of agricultural land on or before the due date for filing the return of income under Section 139(1) of the Income-tax Act, the unutilised amount may be deposited in an account with a notified bank under the Capital Gain Account Scheme, 1988.

The amount deposited in the capital gain account scheme must subsequently be utilised for the acquisition of agricultural land within a period of two years from the date of transfer of the original agricultural land. Where the deposited amount is not utilised for the acquisition of agricultural land within the stipulated two-year period, the unutilised portion shall be deemed to be a long-term capital gain of the previous year in which the two-year time limit expires. In such cases, the assessee is permitted to withdraw the unutilised amount at any time thereafter, in accordance with the provisions of the Capital Gain Account Scheme, 1988.

• Situation in which the exemption under Section 54B can be forfeited

Exemption granted under Section 54B of the Income-tax Act may be withdrawn in the following circumstances:

(a) Non-utilisation of the amount deposited in the capital gain account scheme

Where the deposited amount is not utilised for the acquisition of agricultural land within the stipulated two-year period, the unutilised portion shall be deemed to be a long-term capital gain of the previous year in which the two-year time limit expires. In such cases, the assessee is permitted to withdraw the unutilised amount at any time thereafter, in accordance with the provisions of the Capital Gain Account Scheme, 1988.

(b) Transfer of new land within 3 Years

If the newly acquired agricultural land (referred to as the "new asset") is transferred within a period of three years from the date of its purchase, the exemption claimed under Section 54B shall be governed as follows:

(i) Where the amount of capital gain exceeds the cost of the new asset, the difference shall be chargeable to tax under Section 45 in the year of such transfer. Moreover, to compute capital gains arising from this transfer, the cost of acquisition of the new asset shall be deemed nil.

(ii) Where the capital gain is equal to or less than the cost of the new asset, the exemption shall remain intact. However, if the new asset is transferred within the specified three-year period, the cost of acquisition shall be reduced by the amount of capital gain previously exempted for the purpose of computing capital gains.