When is agricultural income taxable under Income Tax Act?

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Agriculture plays a major role in the Indian economy. It provides the primary source of employment for the majority of the population.

The income that is generated from agricultural activities is agricultural income. Agricultural activities consist of basic operations such as tilting, sowing, irrigating and harvesting. Whatever is sold in the market thereafter becomes the primary product harvested.

The income generated from selling the primary products is not taxable. The agricultural income from primary products are therefore tax exempted.

However, income from investments, property etc are taxable and tax is calculated on them. Now, we consider a farmer who intends to further process or modify the primary harvested product and sells the product in the market in order to enhance the marketable value . The product now no longer remains the primary harvested product.

Therefore, the enhanced marketable value from the modified agricultural product is considered as business income and is taxable. In, short the primary harvested products ate tax free but if some modification is done to enhance the profitability of the products then the profits are taxable.

Maintaining agricultural receipt is very important. Farmers, whose main source of income is from agriculture are needed to keep proofs of earnings and records as specified under Income Tax Act.

Some facts from 2010-2011 Agricultural Census

In the recent agricultural census carried out in the year 2010-11, the total number of operation holdings increased by 7.6% to 138.35 million from 129.22 in 2005-06. Operation holdings denote the lands used wholly or partially for agricultural production as is operated as one technical unit.

In addition to operational holdings, the operated area also marginally increased by 1.6% to 159.9 million ha. In 2010-11 from 158.32 million ha. In 2005-06. this was because unlike previous censuses, all 35 states and union territories have participated in the 2010-2011 agricultural census.

However, the average size of operational holdings in the country has dropped 8% to 1.15 million ha. In 2010-11 from 1.23 million ha. In 2005-06. Moreover, the contribution of agriculture to GDP is also decreasing over the years.

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