How to Compute Income Tax on Agricultural Income?

Under the Income Tax Act, 1961, agricultural income is exempt from tax as per Section 10(1). However, if a taxpayer earns both agricultural and non-agricultural income, the partial integration method is used to determine the applicable tax rate.

When is Agricultural Income Considered for Tax Computation?

The partial integration method applies only if:
✅ Agricultural income exceeds ₹5,000, AND
✅ Non-agricultural income exceeds the basic exemption limit (₹2,50,000 / ₹3,00,000 / ₹5,00,000 depending on age & category).

Step-by-Step Computation of Tax on Agricultural Income

Step 1: Compute Total Income

• Add non-agricultural income (salary, business income, rental income, etc.).
• Exclude pure agricultural income (income from farming, sale of produce, etc.).

Step 2: Apply the Partial Integration Method

Tax is computed in three parts:

Step 3: Apply the Applicable Tax Rate & Add Cess

• Compute tax based on slab rates.
• Add 4% Health & Education Cess.

Example Calculation

Let’s assume a taxpayer has:
🔹 Non-Agricultural Income = ₹8,00,000
🔹 Agricultural Income = ₹3,00,000

Step A: Compute Tax on (₹8,00,000 + ₹3,00,000) = ₹11,00,000

• As per slab rates, tax = ₹1,32,000

Step B: Compute Tax on (₹3,00,000 + ₹2,50,000) = ₹5,50,000

• Tax on ₹5,50,000 = ₹22,500

Final Tax Calculation:

✅ Tax Payable = ₹1,32,000 – ₹22,500 = ₹1,09,500
✅ Add 4% Cess = ₹1,13,880

🔹 Total Tax Payable = ₹1,13,880

Key Points to Remember

✅ Agricultural income alone is tax-free, but it affects the tax rate on other income.
✅ Partial integration applies only if agricultural income > ₹5,000.
✅ Different exemption limits apply based on the taxpayer’s category (individual, senior citizen, etc.).
✅ Agricultural income from tea, rubber, and coffee plantations is partially taxable under Rule 7, 7A, and 7B.