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Is agricultural income really tax-free?
A N Shanbhag |
November 06, 2004
They say that agricultural income is tax-free and this is a source of discontent in many assessments of non-agricultural income.
In actual practice, this is not the case. As dictated by the Constitution of India, agriculture is the subject matter of the states and not the central government. Moreover, for income tax, which happens to be the central government's domain, agricultural income has to be taken into account for the purpose of determining the tax rate. A complicated exercise, made more so by FA04 which has made income up to Rs 100,000 tax-free.
Let us examine the various provisions under a microscope.
Sec. (2) of FA04 states: "Where the assessee has, in the previous year, any net agricultural income exceeding five thousand rupees, in addition to total income, and the total income exceeds fifty thousand rupees, then --
a) the net agricultural income shall be taken into account, in the manner provided in clause 'b' [that is to say, as if the net agricultural income were comprised in the total income after the first fifty thousand rupees of the total income but without being liable to tax], only for the purpose of charging income-tax in respect of the total income; and
b) the income-tax chargeable shall be calculated as follows:
The total income and the net agricultural income shall be aggregated and the amount of income tax shall be determined in respect of the aggregate income at the specified rates as if such aggregate income were the total income.
The net agricultural income shall be increased by Rs 50,000 and the amount of income tax shall be determined in respect of the net agricultural income as specified, as if the net agricultural income as so increased were the total income.
The amount of income-tax determined in accordance with sub-clause 'i' shall be reduced by the amount of income-tax determined in accordance with sub-clause 'ii' and the sum so arrived at shall be the income-tax in respect of the total income.
Now, let us take the case of an agriculturist who has:
Net income after taking all the benefits offered by Chapter VI-A (Sec. 80L, 80D, etc.) of Rs 100,000. Realise that for FY 04-05 and all subsequent years, income up to this level attracts no tax.
Agricultural income of Rs 50,000, which, when increased by Rs 50,000 becomes Rs 100,000 and also becomes tax-free.
(See table for solution.)
Computation of Income Tax
Add : Net Agricultural
Add the Threshold
Less : Tax Thereon
Net Tax Payable
Thus, prior to the changes inflicted by FA04, the assessee was required to pay tax of Rs 10,000 on his normal income of Rs 100,000 by virtue of his also having Rs 50,000 agricultural income. Thus, he would end up paying extra tax of Rs 1,000.
Now, let us turn to the period where the normal income of Rs 100,000 has been made tax-free, thanks to FA04. Many experts feel that since the tax computed in Step-2 of Rs 9,000 has become nil, the net tax payable is Rs 19,000! In other words, if there were no agricultural income amounting to Rs 50,000 the tax payable would have been nil, but because of the agricultural income of Rs 50,000 the assessee will now have to pay tax amounting to Rs 19,000. Effectively, he has to pay a tax of Rs 19,000 on agricultural income of Rs 50,000.
Fortunately, this logic has a fallacy. It arises out of the feeling that income up to Rs 100,000 is tax-free. Yes, it is true that it is tax-free but the freedom arises neither by virtue of increase in the tax threshold, which remains put at Rs 50,000, nor by exemptions offered by Sec. 10. It attracts rebate under the newly inserted Sec. 88D.
Accordingly, "An assessee, being an individual resident in India:
a) whose total income does not exceed one hundred thousand rupees, shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax;
b) whose total income exceeds one hundred thousand rupees and the income-tax payable on such total income (as computed before allowing the deductions under this Chapter) exceeds the amount by which such total income is in excess of one hundred thousand rupees, shall be entitled to a deduction from the amount of income-tax on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds one hundred thousand rupees." The sub clause 'b' offers marginal relief.
Consequently, this rebate is can be claimed on the tax computed in Step-3 of Rs 10,000. This rebate is Rs 9,000 and therefore, the tax payable is Rs 1,000, the same as what was payable before the changes inflicted by FA 04.
The Education Cess of Rs 20, @2 per cent of the tax payable (Rs 1,000), will have to be paid in this new regime and to that extent there will be a small extra load on tax on agricultural income charged by the Centre besides the tax imposed by the states, if any.