Statement I: In India, income from allied agricultural activities like poultry farming and wool rearing in rural areas is exempted from any tax.
Statement II: In India, rural agricultural land is not considered a capital asset under the provisions of the Income-tax Act, 1961.
Which one of the following is correct in respect of the above statements?
[A] Both Statement I and Statement II are correct and Statement II explains Statement I
[B] Both Statement I and Statement II are correct but Statement II does not explain Statement I
[C] Statement I is correct but Statement II is not correct
[D] Statement I is not correct but Statement II is correct
Answer
✅ Correct Option: [D] Statement I is not correct but Statement II is correct
- Statement I is incorrect: Under Section 10(1) of the Income-tax Act, 1961, agricultural income is exempt from tax. However, allied activities such as poultry farming, dairy farming, fisheries, and wool rearing are not treated as agricultural income. These are considered business income and are taxable.
- Statement II is correct: As per Section 2(14) of the Income-tax Act, 1961, rural agricultural land is not considered a capital asset. Thus, any income from its sale is not taxable as capital gains. On the other hand, urban agricultural land (within municipal limits) is considered a capital asset and subject to tax.
Agricultural Income – What is Exempt and What is Not?
Examples of Exempt Agricultural Income (Section 10(1)):
- Income from cultivation and sale of crops.
- Rent received from agricultural land.
- Sale of replanted trees or seeds.
- Income from growing flowers and creepers.
- Compensation received from the government on acquisition of agricultural land.
Examples of Non-Exempt (Taxable) Income:
- Income from poultry farming, dairy farming, bee hiving, fisheries.
- Dividends paid from agricultural companies.
- Income from processing farm produce without involving basic cultivation.
👉 Shortcut to remember:
“Land = Exempt, Livestock = Taxable”.
Also See: Business Responsibility and Sustainability Report: UPSC Prelims Question
Rural vs. Urban Agricultural Land (Section 2(14))
| Type of Land | Definition | Tax Treatment |
|---|---|---|
| Rural Agricultural Land | Land in India outside municipal limits: – Beyond 2 km if population 10,001–1,00,000 – Beyond 6 km if population 1,00,001–10,00,000 – Beyond 8 km if population >10,00,000 | Not a capital asset → No capital gains tax |
| Urban Agricultural Land | Land within municipal/cantonment limits as per above criteria | Capital asset → Sale attracts capital gains tax |
Broader Exempt Income under Income Tax Act, 1961
Apart from agricultural income, several incomes are fully or partially exempt:
- Salaried employees:
- House Rent Allowance (HRA) – partially exempt.
- Leave Travel Concession (LTC).
- Children’s education and hostel allowance.
- Gratuity, VRS compensation (up to limits).
- Other sources:
- Life insurance maturity proceeds [Section 10(10D)].
- Public Provident Fund (PPF) interest.
- Sukanya Samriddhi Yojana proceeds.
- Gifts from relatives or on marriage.
- Scholarships.
- Government awards.
👉 Note: Under the new tax regime, most exemptions (like HRA, LTC) are not available.
Also See: Sources of Income of RBI: UPSC Prelims 2025
Why Agricultural Income is Politically Sensitive?
- India has ~50% workforce dependent on agriculture.
- Taxing agricultural income is politically unpopular.
- However, allied activities (poultry, dairy, fisheries) are increasingly commercialized and are therefore taxable.
Mnemonic to Remember – “FARM SEEDS”
For exempt agricultural income:
- F – Flowers & creepers
- A – Agricultural produce directly grown
- R – Rent from land
- M – Money received for government acquisition
- SEEDS – Sale of seeds, trees, replanted crops
Also See: Alternative Investment Funds – UPSC Prelims 2025
Practice Prelims Questions
Q1. Which of the following is treated as agricultural income under the Income-tax Act, 1961?
[A] Poultry farming income
[B] Rent received from agricultural land
[C] Income from fisheries
[D] Income from wool rearing
✅ Answer: [B] Rent received from agricultural land
Q2. Under the Income-tax Act, 1961, which type of agricultural land is considered a capital asset?
[A] Rural agricultural land
[B] Land beyond 8 km from a city with population above 10 lakhs
[C] Urban agricultural land within municipal limits
[D] Any agricultural land, whether rural or urban
✅ Answer: [C] Urban agricultural land within municipal limits
Also See: Key Government Directorates under Department of Revenue – UPSC Prelims 2025
FAQs
Q1. Is all agricultural income exempt in India?
No. Only income directly from land cultivation is exempt. Allied activities (dairy, poultry, fisheries) are taxable.
Q2. What is the difference between rural and urban agricultural land in taxation?
Rural agricultural land: Not a capital asset → No capital gains tax.
Urban agricultural land: Capital asset → Sale taxable.
Q3. Does agricultural income affect tax slabs?
Yes. Agricultural income is added to non-agricultural income for determining the tax slab rate (partial integration rule), though it is itself exempt.
Q4. Why is urban agricultural land taxed?
Because it has higher commercial value, often used for real estate rather than farming.
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