Tag: Schedule II

Agricultural Income: Exemption, Partial Integration and Tax Calculation

Posted on by CA Meet Dhrangadhariya

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

Quick summary

  • Agricultural income from land in India is not included in total income (Schedule II of the Income-tax Act, 2025, earlier section 10(1)).
  • It covers rent from agricultural land, income from farming and processing the produce to make it fit for market, income from farm buildings, and nursery income.
  • Tea, coffee and rubber income is split by Rule 271 of the Income-tax Rules, 2026, with 35% to 40% taxable as business income.
  • If net agricultural income exceeds ₹5,000 and other income is above the basic exemption limit, the exempt income raises the tax rate on the rest (partial integration).

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:

Income from Taxable as business income Agricultural (exempt)
Sale of tea grown and manufactured by the seller in India 40% 60%
Sale of coffee grown and cured by the seller in India 25% 75%
Sale of coffee grown, cured, roasted and ground by the seller in India, with or without chicory or flavouring 40% 60%
Sale of centrifuged latex, cenex, latex based crepes, brown crepes or technically specified block rubbers made from field latex or coagulum from rubber plants grown by the seller in India 35% 65%

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.

Step Amount in ₹
Tax on ₹9,00,000 (7,00,000 plus 2,00,000) 92,500
Tax on ₹4,50,000 (2,50,000 exemption limit plus 2,00,000) 10,000
Tax on total income (92,500 minus 10,000) 82,500
Cess at 4% 3,300
Total tax 85,800

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

Is agricultural income taxable?

No. It is not included in total income (Schedule II, Sl. No. 1 of the Income-tax Act, 2025), but it is taken into account to work out the tax rate on your other income if it exceeds ₹5,000 and your other income is above the basic exemption limit.

Is income from agricultural land abroad exempt?

No. The definition covers land situated in India only.

Is dairy farming, poultry or fishing agricultural income?

No. The income must be derived from land by agriculture. These activities are taxed as business income.

Is the sale of agricultural land exempt?

Rural agricultural land is not a capital asset, so there is no capital gain. Land inside the municipal limits and distance bands in the definition of capital asset is a capital asset and the gain is taxable, with relief under section 83 if you buy new agricultural land.

Which ITR form do I use if I have agricultural income?

ITR-1 and ITR-4 cannot be used if agricultural income exceeds ₹5,000. Use ITR-2 or ITR-3 as applicable.

Official sources

Related reading

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.

Tax-Free Income in India: Complete List for Tax Year 2026-27

Posted on by CA Meet Dhrangadhariya

Last updated: 15 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The Income-tax Act, 2025 lists tax-free income in Schedule II (for everyone) and Schedule III (for eligible persons), with salary items in section 19 and gifts in section 92.
  • Agricultural income, Sukanya Samriddhi payouts, PPF and EPF within the interest limits, most life insurance maturity, gratuity and VRS compensation within limits are tax-free.
  • Several Schedule III items, such as LTA and special allowances, are lost in the new tax regime.
  • Tax-free income must still be reported in the return.

Some income does not form part of your total income at all. It is not taxed and no deduction has to be claimed for it. In the Income-tax Act, 2025, which applies from 1 April 2026, this list sits mainly in Schedule II (income not to be included in total income) and Schedule III (income of eligible persons), with salary related receipts in section 19 and gifts in section 92. For FY 2025-26 the corresponding list is in section 10 of the 1961 Act.

Exemption and deduction are different

An exemption keeps the income out of total income, so you only report it. A deduction is taken from income that has been included, and is allowed only up to its limit. Standard deduction, section 80C and similar items are deductions, not exemptions.

Schedule II: tax-free for everyone

Income Conditions and limits
Agricultural income No condition. It is still counted to fix the tax rate on other income if it exceeds ₹5,000
Life insurance maturity or other payout, including bonus Policy issued 01/04/2003 to 31/03/2012: premium up to 20% of sum assured. 01/04/2012 to 31/03/2013: up to 10%. 01/04/2013 to 31/01/2021: up to 15% for a special policy and 10% for others. From 01/04/2023: below 15% (special policy) or 10% (others), and for ULIPs total yearly premium below ₹2,50,000, for other policies below ₹5,00,000 across all policies. Keyman policies and the sum under section 127(4) are not exempt. A death claim is exempt
Payment from a statutory provident fund or notified fund Interest on contributions made on or after 01/04/2021 is taxable if the yearly contribution is above ₹5,00,000 (no employer contribution) or ₹2,50,000 (other cases)
Accumulated balance of a recognised provident fund (EPF) To the extent provided in the Act; the same ₹2,50,000 and ₹5,00,000 interest limits apply
Sukanya Samriddhi Account payouts No limit
National Pension System payout On closure or opting out, up to 60% of the amount payable.
Agniveer Corpus Fund payout Whole amount
Approved superannuation fund payments On death, retirement or incapacity, and certain refunds
Scholarships Granted to meet the cost of education
Awards and rewards Instituted in the public interest by the Government or approved by it
Interest on notified Central Government securities, bonds, savings certificates and deposits As notified
Gold Deposit Bond and Gold Monetisation Scheme interest Whole amount
Interest on local authority and State pooled finance entity bonds As notified
Transfer of units of the Unit Scheme, 1964 On or after 01/04/2002
Unified Pension Scheme payouts Up to 60% of the individual corpus on retirement, and the notified lump sum

Schedule III: tax-free for eligible persons

Income Who and conditions
Sums received by a member from a Hindu undivided family Paid out of family income, and not covered by section 99(3) and (4)
Partner’s share of profit Firm separately assessed, in the profit sharing ratio. Salary and interest from the firm are taxable
Compensation for a disaster from the Government or local authority Where no deduction was earlier allowed for the loss
NPS partial withdrawal Up to 25% of the contributions made by the subscriber
Daily allowance and constituency allowance of MPs and members of State Legislatures Whole amount
Leave travel concession (LTA) Up to the prescribed journeys and amount actually spent. Not available in the new regime
Allowances and perquisites paid by the Government outside India Citizen of India serving outside India
Tax paid by the employer on a non-monetary perquisite At the employer’s option
Special allowance for actual expenditure (serial 11), and the prescribed allowances in serial numbers 12 and 13 (Rule 280) Within the limits of the Income-tax Rules, 2026. Mostly not available in the new regime
Income of Scheduled Tribe members in notified areas, and of Sikkimese See the separate post on section 10(26)

Salary related receipts (section 19)

Receipt Tax-free limit
Death-cum-retirement gratuity of government employees Entire amount
Gratuity under the Payment of Gratuity Act, 1972 As calculated under section 4(2) and (3) of that Act, up to ₹20,00,000
Other gratuity Least of the actual amount, the notified limit, and half a month’s average salary of the last ten months for each completed year of service
Commutation of pension Government employees: entire amount. Others: one-third of the pension where gratuity is received, or one-half where it is not
Retrenchment compensation to a workman Least of the compensation, the amount under section 25F(b) of the Industrial Disputes Act, 1947, and the notified amount (not less than ₹50,000)
Voluntary retirement compensation Up to ₹5,00,000
Leave encashment on retirement Government employees: entire amount. Others: least of the cash equivalent of leave (up to 30 days a year of service), ten months’ average salary, the notified limit and the amount received

“Salary” for gratuity and leave encashment means basic pay plus dearness allowance if the terms of employment provide for it, and no other allowance or perquisite. The ceilings are fixed by Central Government notification: ₹20,00,000 for gratuity (notifications of 29 March 2018 and 8 March 2019) and ₹25,00,000 for leave encashment on retirement of a non-government employee (Notification 31/2023, from 1 April 2023). Check that no later notification has changed them. Employees who change jobs should also note that the gratuity limit is a lifetime figure reduced by gratuity already exempted in earlier years.

Gifts (section 92)

Money or property received without consideration is taxable if it totals more than ₹50,000 in a year (for property bought for less than its value, if the shortfall exceeds ₹50,000). It is not taxable at all when it comes from a relative, on the occasion of the individual’s marriage, under a will or by inheritance, in contemplation of death, from a local authority, from a registered non-profit organisation (with exceptions), through certain transactions not treated as transfers, or from an individual to a trust created solely for the benefit of a relative.

New tax regime

Section 202 of the 2025 Act removes some of these when the new regime applies: the Schedule III items at serial numbers 5, 6, 7, 8, 11 and 17, and the prescribed allowances at serial numbers 12 and 13, along with professional tax and a few other deductions. Schedule II items, section 19 receipts, and gifts are not touched. The family pension deduction is ₹25,000 in the new regime and ₹15,000 otherwise, each limited to one-third of the pension.

Tax-free income is not the same as the basic exemption limit

Income up to the basic exemption limit is simply not taxed at the slab rates. The limit is ₹4,00,000 under section 202 (new regime), and in the old regime ₹2,50,000 below age 60, ₹3,00,000 for resident seniors and ₹5,00,000 for resident super seniors. On top of that, a resident individual gets a rebate: ₹60,000 where total income does not exceed ₹12,00,000 (new regime, section 156), and ₹12,500 where it does not exceed ₹5,00,000 (old regime).

Report exempt income

Show exempt income in the exempt income schedule of the return. The department matches it with Form 26AS, AIS and the Taxpayer Information Summary, and an unreported receipt causes mismatches.

Frequently asked questions

Where does the Income-tax Act 2025 list tax-free income?

In Schedule II (income not included in total income of anyone), Schedule III (for eligible persons), section 19 (salary related receipts such as gratuity and leave encashment) and section 92(3) (gifts that are not taxed).

Is life insurance maturity tax-free?

Mostly. A policy issued on or after 01/04/2023 qualifies if the premium is below 10% of the sum assured (15% for special policies) and, for non-ULIP policies, the aggregate annual premium is below ₹5,00,000. A death claim is tax-free.

Is PPF interest tax-free?

Yes, with a limit. Interest on contributions above ₹2,50,000 a year (₹5,00,000 where the employer makes no contribution) made on or after 01/04/2021 is taxable.

Are gifts taxable?

Money or property received without consideration above ₹50,000 in a year is taxable, unless it is from a relative, on marriage, by will or inheritance, in contemplation of death, or from certain institutions.

Do tax-free incomes go in the return?

Yes. Exempt income is reported in the exempt income schedule, even though it is not taxed.

Official sources

Related reading

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.