Start with the applicable year and definition
This guide covers the Income-tax Act, 1961 through AY 2026–27 (FY 2025–26). For the tax year beginning 1 April 2026, check the Income-tax Act, 2025 and the corresponding rules. Under the 1961 Act, section 10(1) excludes agricultural income as defined in section 2(1A). That definition covers qualifying rent or revenue from Indian land used for agriculture, income from cultivation, and specified ordinary market preparation or sale of produce by the cultivator or receiver of rent in kind. It also covers certain farm buildings. Section 2(1A), Explanation 3, deems income from saplings or seedlings grown in a nursery agricultural income. The character of each receipt matters; ownership of farmland alone does not establish its source.
When partial integration applies
For AY 2026–27, section 2(2) of the Finance Act, 2026 applies the rate calculation to the specified individuals, HUFs, AOPs, BOIs and artificial juridical persons when net agricultural income exceeds ₹5,000 and total income exceeds the applicable basic exemption amount. The old-regime amounts are ₹2,50,000 generally, ₹3,00,000 for resident individuals aged 60 to 79, and ₹5,00,000 for resident individuals aged 80 or more. The section 115BAC(1A) amount is ₹4,00,000 for AY 2026–27, compared with ₹3,00,000 for AY 2025–26. Use the Finance Act for the particular assessment year. Firms (including LLPs) and companies are outside this partial-integration calculation. The agricultural amount is used to determine the rate on taxable income; it is not itself added to taxable total income.
| Step | Working | Control |
|---|---|---|
| 1 | Calculate slab tax on total income plus net agricultural income. | Use the applicable year and regime; address any special-rate income separately. |
| 2 | Calculate slab tax on the applicable basic exemption amount plus net agricultural income. | Use the same rate schedule. |
| 3 | Subtract step 2 from step 1. | Keep net agricultural income out of taxable total income. |
| 4 | Apply any eligible section 87A rebate or marginal relief, applicable surcharge and its marginal relief, then 4% health and education cess and statutory rounding. | Check total income, residence, rate regime and any special-rate restrictions. The worked examples assume ordinary income and no surcharge unless specified. |
Composite receipts and nursery income
First compute composite income under the relevant rule. The prescribed percentages are shares of computed income, not of gross sales.
| Qualifying activity | Provision | Agricultural share | Business share |
|---|---|---|---|
| Tea grown and manufactured by the seller in India | Rule 8 | 60% | 40% |
| Specified rubber products manufactured or processed from field latex or coagulum from rubber plants grown by the seller in India | Rule 7A | 65% | 35% |
| Coffee grown and cured by the seller in India | Rule 7B(1) | 75% | 25% |
| Coffee grown, cured, roasted and ground by the seller in India, with or without chicory or other flavouring | Rule 7B(1A) | 60% | 40% |
Rule 7 is the general rule for other composite agriculture and business activities. Dairy, poultry, fisheries and animal husbandry receipts do not qualify merely because operations take place on a farm; classify the actual activity under the applicable provisions. The nursery deeming rule covers income derived from saplings or seedlings grown in the nursery, rather than resale of purchased plants, landscaping services or all other nursery receipts.
Eight worked cases
Case 1: Old regime, ₹9 lakh taxable income and ₹3 lakh net agricultural income
Harish, aged 45, uses the old regime for FY 2024–25 (AY 2025–26). Both triggers are met. Tax on ₹12,00,000 is ₹1,72,500: ₹12,500 at 5%, ₹1,00,000 at 20% and ₹60,000 at 30%. Tax on ₹2,50,000 + ₹3,00,000 = ₹5,50,000 is ₹22,500 (₹12,500 + ₹10,000). The difference is ₹1,50,000; with ₹6,000 cess, tax is ₹1,56,000. Without integration, tax on ₹9,00,000 would be ₹92,500 plus ₹3,700 cess, or ₹96,200. The increase is ₹59,800.
Case 2: New regime, the same amounts in two years
Ananya, a resident individual, has ₹8,00,000 in normal-rate total income and ₹2,00,000 net agricultural income. For FY 2024–25, tax on ₹10,00,000 is ₹50,000 (₹20,000 + ₹30,000), and tax on the ₹3,00,000 exemption amount plus ₹2,00,000 is ₹10,000. The difference is ₹40,000. Income exceeds the ₹7,00,000 rebate threshold by ₹1,00,000, more than this tax, so marginal relief does not apply. Tax with ₹1,600 cess is ₹41,600.
For the same facts in FY 2025–26, tax on ₹10,00,000 is ₹40,000 (₹20,000 + ₹20,000), and tax on ₹4,00,000 + ₹2,00,000 is ₹10,000. The difference is ₹30,000. On these ordinary-income facts, ₹8,00,000 total income is within the ₹12,00,000 threshold and the ₹30,000 tax is within the ₹60,000 section 87A ceiling. Rebate reduces tax and cess to nil.
Case 3: Sale of rural and urban agricultural land
Ramesh and Suresh each sell two acres for ₹1.20 crore. Assume Ramesh’s land is agricultural land in India outside all applicable section 2(14)(iii) limits and held as an investment: its disposal is outside capital gains because it is not a capital asset. Do not treat the sale proceeds as cultivation income. Suresh’s agricultural land is four kilometres aerially from the relevant Gurugram municipal boundary. Assuming the statutory population is more than one lakh, four kilometres is within the applicable six- or eight-kilometre band and the land is a capital asset. The gain is not the sale price; cost, dates and any other applicable provisions must be established. Section 54B may apply to an eligible individual or HUF if the agricultural-use and two-year reinvestment conditions are met. Section 10(37) has its own conditions, including qualifying compulsory acquisition and prior agricultural use.
Under section 2(14)(iii), check the municipal or cantonment area first, including its population threshold of at least 10,000. Outside its limits, the relevant aerial bands are up to two kilometres for population over 10,000 and up to one lakh; six kilometres for over one lakh and up to ten lakh; and eight kilometres for over ten lakh. Use the statutory census reference and boundary evidence.
Case 4: LLP earns ₹80 lakh of pure agricultural income
If the entire ₹80,00,000 is qualifying agricultural income, section 10(1) excludes it and the LLP does not perform partial integration. Separately assess any taxable business receipts and the conditions of section 10(2A) for a partner’s share in a separately assessed firm. Do not treat remuneration or interest as exempt profit share.
Case 5: ₹18 lakh cash deposits attributed to four acres
A doctor attributes ₹18,00,000 of deposits to a four-acre family farm, or ₹4,50,000 per acre if all deposits represent crop receipts. This ratio alone cannot prove or disprove the claim. Match land use and cultivation rights, actual crop output, sales, costs and the dates and amounts deposited. If the proposal is to tax the entire amount as unexplained under an applicable provision for AY 2025–26, the section 115BBE illustration is ₹10,80,000 tax (60%), ₹2,70,000 surcharge (25% of that tax) and ₹54,000 cess (4% of tax and surcharge): ₹14,04,000 before any separate penalty or interest. A deposit does not itself establish an addition. Check the statutory basis, including whether section 68 concerns a credit in the taxpayer’s books or whether a different provision is invoked.
Case 6: A rented poly-house nursery earns ₹35 lakh
The entrepreneur leases one acre near Pune and grows saplings and seedlings in pots and poly-houses. If the full ₹35,00,000 net profit is derived from saplings and seedlings grown in that nursery, Explanation 3 to section 2(1A) deems it agricultural income. Separate other plants or activities whose receipts do not meet the definition, including bought-in stock or landscaping. For a qualifying taxpayer, test partial integration with taxable total income.
Case 7: Sugarcane sold raw or converted to jaggery or sugar
Balwinder grows cane on 25 acres. The ₹18,00,000 received for his own raw cane is a qualifying agricultural receipt on these facts. Deduct allowable cultivation expenses in computing net agricultural income. Alternatively, assume he manufactures jaggery or sugar from the cane and receives ₹32,00,000 for the processed output. Rule 7 deducts the prescribed market value of the own-grown cane from the business computation, without a second deduction there for cultivation expenditure. Where comparable raw cane is ordinarily sold, use the average relevant-year selling price under Rule 7(2)(a), not a price chosen at harvest. If the supported Rule 7 input value is ₹18,00,000, the ₹14,00,000 balance is before allowable manufacturing and other business expenses. Cultivation expenses and business expenses were not specified, so neither net amount can be fixed.
Case 8: ₹28 lakh deposited by a farmer in Haryana
Assume the farmer cultivates 15 irrigated acres and attributes ₹28,00,000 of FY 2024–25 deposits to paddy and wheat. The implied receipts are about ₹1,86,667 per acre, if the full amount is from those sales. Reconcile land and crop records, mandi sale slips such as Form J where issued, gate or transport records, input bills and official crop or yield evidence where available. Tie sale quantities, prices and dates to cash receipts and bank deposits. A notice under section 142(1) or an SFT entry calls for a factual response; no prescribed bundle guarantees acceptance.
Farm buildings and other frequently asked questions
For section 2(1A)(c), check the building’s occupation, its location on or near the land, the need for it because of the connection with the land, and the land-revenue or location conditions. A farmhouse used for weddings, filming or commercial stays does not qualify as agricultural income merely because it stands on agricultural land. Determine the correct taxable head from the use and the arrangements.
1. What if ordinary taxable income is ₹2,40,000 and net agricultural income ₹15,00,000?
For a taxpayer whose basic exemption is at least ₹2,50,000, the taxable-income trigger is not met. On these ordinary-income facts there is no integration or slab tax.
2. What if net agricultural income is ₹4,500?
It does not exceed ₹5,000. Partial integration does not apply on that basis.
3. Where is the amount reported?
For AY 2026–27, ITR-1 permits agricultural income up to ₹5,000 if the taxpayer otherwise qualifies. For an individual with higher agricultural income use the applicable return, ordinarily ITR-2 without business income or ITR-3 with business income. Reconcile gross receipts, expenses, applicable agricultural loss adjustments and net income in Schedule EI where provided. The notified AY 2026–27 ITR-2 asks for land details where net agricultural income exceeds ₹5,00,000: district and PIN code, area in acres, ownership or lease, and irrigation status.
4. Can agricultural losses reduce salary or non-agricultural business profit?
No. Apply the relevant Finance Act’s agricultural-income computation rules to any agricultural loss adjustment; it is not a set-off against ordinary taxable income.
5. Can rent for land let for cultivation be agricultural income?
Yes, if derived from Indian land actually used for agricultural purposes and the statutory conditions are satisfied. Confirm the lease and actual land use.
6. Are irrigation or solar subsidies necessarily tax-free?
No general conclusion follows from the purpose of the subsidy. Read the scheme, the receipt and applicable income, exemption and asset-cost provisions before classifying it.
Sources
- Income-tax Act, 1961: section 2 definitions
- Income-tax Act, 1961: sections 10, 54B, 68, 69A, 87A, 115BAC and 115BBE
- Finance Act, 2025: First Schedule for AY 2025–26
- Finance Act, 2025: amendment of section 87A
- Finance Act, 2026 Gazette copy: section 2, Parts I-A and IV-A for AY 2026–27
- Income-tax Rules, 1962: Rule 7 composite income
- Rule 7A: rubber
- Rule 7B: coffee
- Rule 8: tea
- Notified ITR-2 for AY 2026–27: Schedule EI
- Income Tax Department: agricultural income and partial integration
- Income Tax Department: transition between the Acts