Partial integration of agricultural income with total income (as set, 1961 Act, AY 2018-19)

Agricultural income and the purpose of the scheme

Agricultural income is not part of total income (section 10(1)); it is defined in section 2(1A) as rent or revenue from land in India used for agricultural purposes and income derived from such land by agriculture, by the processes a cultivator uses to make the produce marketable, or by selling the produce. Without more, a person with large farm income would pay tax on his other income at the lowest slab rates. Partial integration keeps the farm income itself untaxed but uses it to fix the rate at which the non-agricultural income is taxed. The scheme is laid down each year in the Finance Act that fixes the rates, not in the Income-tax Act itself: for assessment year 2018-19, the Finance Act, 2018, section 2(2).

When the scheme applies

For assessment year 2018-19 all three conditions must hold (Finance Act, 2018, section 2(2) and its provisos):

1. the assessee is an individual, a Hindu undivided family, an association of persons, a body of individuals or an artificial juridical person (not a firm or a company);
2. net agricultural income is more than ₹5,000; and
3. non-agricultural income is more than the basic exemption limit (₹2,50,000 below 60 years, ₹3,00,000 for a resident aged 60 to 79, ₹5,00,000 for a resident aged 80 or more).

How the tax is computed

(Finance Act, 2018, section 2(2)(b))

1. Compute tax on the non-agricultural income plus the net agricultural income, at the slab rates.
2. Compute tax on the net agricultural income plus the basic exemption limit, at the same rates.
3. Tax on the non-agricultural income = step 1 minus step 2.
4. Deduct any rebate under section 87A: a resident individual whose total income does not exceed ₹3,50,000 gets the income-tax so computed (before the Chapter VIII deductions) or ₹2,500, whichever is less (section 87A, with the limits for this year as substituted by the Finance Act, 2017, section 38). Then add surcharge if any and education cess of 3% (Finance Act, 2018, section 2(11) and (12)).

Example (our own figures)

A resident individual aged 40 has non-agricultural income of ₹7,00,000 and net agricultural income of ₹1,50,000 in 2017-18. Rates (Finance Act, 2018, First Schedule, Part I, Paragraph A, item (I)): nil to ₹2,50,000, 5% to ₹5,00,000, 20% to ₹10,00,000, 30% above.

Tax on ₹7,00,000 alone would have been ₹52,500 plus cess, so the farm income has raised the rate on the other income without itself being taxed.