# Agricultural Income [Section 2(1A)]
Agricultural income is exempt under Section 10(1), but it is aggregated for rate purposes (partial integration) for individuals/HUFs/AOPs/BOIs. The definition in Section 2(1A) is wide and covers income arising in three ways.
## Way 1 — Rent or Revenue from Agricultural Land
Income derived from land used for agricultural purposes. Three cumulative conditions:
1. It must be derived from land.
2. The land must be situated in India (income from foreign agricultural land is taxable, not exempt).
3. The land must be used for agricultural purposes.
Rent may be received by a landowner or an original tenant from a sub-tenant; "revenue" is wider than rent (e.g., fees for leasing land).
## Way 2 — Income from Agricultural Operations
"Agriculture" is not defined in the Act. It means cultivation involving human skill and labour, comprising:
- Basic operations absolutely necessary — tilling, sowing, planting.
- Subsequent operations continuing on the basic operations — weeding, harvesting, etc.
Not agriculture: dairy farming, poultry, rearing of livestock, butter/cheese making.
Nursery [Explanation 3]: Income from growing saplings/seedlings in a nursery is agricultural income — even if the basic operations are not carried out on land.
Market-process income: Income from processes that render produce fit for market (threshing, cleaning) is agricultural — provided the process is ordinary and necessary.
Sale of produce: Income from sale of agricultural produce by the cultivator/rent-receiver is agricultural income (land in India, used for agriculture).
### Partly Agricultural / Partly Business — Apportionment Rules
When produce is grown and then manufactured, income splits:
- Rule 7: Market value of own agricultural produce used as raw material in the business is deducted from total income; that market value is treated as agricultural income.
- Determining market value: If saleable raw/after ordinary processing → average selling price during the year. If not saleable in raw form → cultivation expenses + land revenue/rent + reasonable profit (as determined by the AO).
| Rule | Income Source | Agricultural (exempt) % | Business (PGBP) % |
|---|---|---|---|
| 7A | Sale of rubber products (rubber grown by seller in India) | 65% | 35% |
| 7B | Coffee grown and cured by seller in India | 75% | 25% |
| 7B | Coffee grown, cured, roasted & grounded by seller in India | 60% | 40% |
| 8 | Tea grown and manufactured by seller in India | 60% | 40% |
## Way 3 — Income from Farm Buildings
Income from a farm building is agricultural only if all conditions are met:
1. Ownership & occupancy: building owned and occupied by the receiver of rent/revenue, or by the cultivator/receiver of rent-in-kind.
2. Purpose: used solely for agricultural purposes (letting for residence/business disqualifies it). The building must be on or in the immediate vicinity of the land and required for residence/storage due to the connection with the land.
3. At least ONE additional condition:
- Land is assessed to land revenue / local rate collected by government officers; OR
- If not so assessed, the land must not lie within the population-based aerial-distance limits below.
### Urban-area test (aerial distance vs. population)
| Shortest aerial distance from municipality/cantonment limits | Population (last published census before 1st April of PY) |
|---|---|
| ≤ 2 km | > 10,000 |
| > 2 km but ≤ 6 km | > 1,00,000 |
| > 6 km but ≤ 8 km | > 10,00,000 |
If the land falls within these limits, it is urban (farm-building income there is not agricultural).
## Two important clarifications
- Transfer of urban agricultural land [Explanation 1]: Capital gains on transfer of urban agricultural land are NOT agricultural income — they are taxable under Section 45.
- Indirect connection with land: A receipt does not become agricultural merely because it is indirectly connected with land (e.g., managing-agent commission computed on company profits that include agricultural income → not agricultural).