New regime, new way: budget shines light on computing tax on agri income

The method used to compute tax on income of taxpayers with agri income has been included in Finance Bill 2024.

“The budget 2024 proposes to explicitly include the computation mechanism used when an individual taxpayer or HUF has agricultural income for the purpose of the optional tax regime as well,” said Vishwas Panjiar, partner, Nangia Andersen LLP.

The Income Tax Act exempts agricultural income from tax. However, taxpayers with agricultural income over ₹5,000 who have other incomes also have to consider the agricultural income to determine which tax slab is applicable. But, agricultural income is not taxed. There’s a three-step method to calculate tax in such cases. The taxpayer has to first add all the incomes and calculate total tax liability on it. In the second step, they should calculate tax on the sum of basic exemption limit and agricultural income as per applicable income tax rates. Third, deduct the tax calculated in the second step from the total tax liability determined in the first step.

To explain with an example, say you have business income of ₹8 lakh and agriculture income of ₹2.5 lakh. Your tax slab is 30% and tax liability on sum of both income is ₹1.25 lakh. Next, tax on the sum of ₹2.5 lakh (exemption limit) and agricultural income of ₹2.5 lakh is ₹12,500. Since agricultural income is exempt from tax, the total tax you pay is ₹1.13 lakh ( ₹1.25 lakh- ₹12,500).

“While this position has been there from the genesis, it was not specifically enunciated in “new” optional tax regime which was originally introduced in the year 2020 for individuals/HUF. This is more of a clarificatory amendment and should be viewed as such as this brings parity between the regimes,” said Panjiar.

Maneet Pal Singh, partner, I.P. Pasricha & Co, said the inclusion of agriculture income in total income without taxing it serves several purposes.

“Firstly, it facilitates a comprehensive assessment of an individual’s overall financial picture. Secondly, it helps in determining the taxpayer’s eligibility for various exemptions and deductions based on the total income. Additionally, this approach promotes transparency and accountability in financial reporting, aiding in the prevention of tax evasion. While agricultural income may be exempt from tax, its inclusion ensures a holistic evaluation of an individual’s economic standing for regulatory and policy considerations.”