Agricultural Income: Exemption, Partial Integration and Tax Calculation

Last updated: 07 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Farm income is one of the oldest tax exemptions in India, because the Centre taxes income under Entry 82 of the Union List, which does not cover agriculture. From Tax Year 2026-27 the exemption is serial number 1 of Schedule II of the Income-tax Act, 2025 (it was section 10(1) of the 1961 Act), and the definition is in section 2(5).

What is agricultural income?

The Act defines it as:

1. Rent or revenue from land situated in India and used for agricultural purposes.
2. Income derived from such land by agriculture, by the process a cultivator or receiver of rent-in-kind ordinarily uses to make the produce fit to be taken to market (for example drying, cleaning, grading), or by selling that produce when nothing more than such a process has been done.
3. Income from a farm building owned and occupied by the receiver of rent or revenue, or occupied by the cultivator, where the building is on or near the land and is needed as a dwelling house, store-house or other out-building because of the connection with the land. The land must be assessed to land revenue or a local rate, or, if it is not, it must not lie in a municipal or cantonment area above the population limits and distances in the definition of capital asset.
4. Income from saplings or seedlings grown in a nursery.

The definition does not include income from a farm building or land that is used for something other than agriculture, including letting it for residential or business use. It also excludes income from transferring land that falls within the municipal limits and distance bands mentioned above.

What is not agricultural income?

The income has to come from land through agriculture, so these are taxed under other heads:

• dairy farming, poultry, fisheries and bee-keeping,
• income from timber or forest trees of spontaneous growth,
• income from agricultural land held as stock-in-trade,
• income from butter, cheese or similar factory processing separate from the farm,
• dividends and remuneration that are merely calculated by reference to agricultural profits, and
• agricultural income from land outside India, which is taxable for a resident.

Tea, coffee and rubber

Where the grower also processes the crop, part of the income is treated as business income. Under Rule 271 of the Income-tax Rules, 2026 (earlier Rules 7, 7A, 7B and 8), the share of income that is liable to tax is:

An allowance is made for the cost of replanting dead or useless plants or bushes in an area already planted.

Partial integration of agricultural income

Agricultural income is exempt, but a person with substantial farm income and other income is not allowed to benefit from low slab rates twice. The method is laid down each year by the Finance Act. Section 3(2) of the Finance Act, 2026 applies it to Tax Year 2026-27, in both regimes, to an individual, HUF, AOP, BOI or artificial juridical person when:

• net agricultural income is more than ₹5,000, and
• non-agricultural income is more than the basic exemption limit.

The basic exemption limit is ₹4,00,000 for a person taxed under section 202 (the new regime). In the old regime it is ₹2,50,000 below age 60, ₹3,00,000 for resident seniors (60 to 80) and ₹5,00,000 for resident super seniors (80 and above).

Steps:

1. Work out tax on non-agricultural income plus net agricultural income, at the slab rates.
2. Work out tax on the basic exemption limit plus net agricultural income.
3. Tax on total income is (1) minus (2), then rebate, surcharge and cess as applicable.

Example (old regime, individual below 60)

Non-agricultural income is ₹7,00,000 and net agricultural income is ₹2,00,000.

Companies, firms, LLPs, co-operative societies and local authorities are outside this method.

Selling agricultural land

• Rural agricultural land (not in the municipal and distance bands) is not a capital asset, so its sale gives no capital gain.
• Land within those bands is a capital asset, and the gain is taxable and is not agricultural income. The bands are land inside a municipality or cantonment board area with a population of 10,000 or more, and land within 2 km (population above 10,000 to 1 lakh), 6 km (above 1 lakh to 10 lakh) or 8 km (above 10 lakh) of its limits.
• Section 83 (section 54B of the 1961 Act) gives relief to an individual or HUF who sells land that the assessee, a parent or the HUF used for agriculture in the two years before the transfer and buys other agricultural land within two years after the transfer. The gain not exceeding the cost of the new land is not charged. A gain not used by the return due date has to be deposited in a specified bank or institution under the notified scheme.

Return filing

ITR-1 and ITR-4 cannot be used if agricultural income exceeds ₹5,000. Report it in the agricultural income schedule of ITR-2 or ITR-3 as applicable, and keep the evidence of the land and the produce.

Frequently asked questions

Official sources

• Income Tax Department: Income-tax Act 2025 as amended by Finance Act 2026 (sections 2(5), 2(22), 83 and Schedule II)
• Finance Act, 2026 (section 3(2), partial integration)
• Income Tax Department: Income-tax Rules, 2026 (Rule 271 and the ITR eligibility rules)

Related reading

• Difference Between Exemption, Deduction and Rebate in Income Tax
• Section 80P: Deduction for Co-operative Societies, Activities and Limits

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Agricultural Income, Partial Integration, Schedule II, Section 10(1), Section 83, Tea Coffee Rubber

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