Income Tax Bill 2025 Tweaks Taxation on Agricultural Income: Here's What Has Changed

For the first time in 65 years, India is set to see an overhaul of its income tax law with the coming of a new Income Tax Bill (ITB) 2025. The new Bill is supposedly set to come into effect in 2026. Finance Minister Nirmala Sitharaman tabled the ITB 2025 on February 13 in Lok Sabha, which, when passed through all Parliamentary proceedings, will replace the Income Tax Act 1961.

The Bill also seeks to simplify how the term ‘Agricultural Income’ is interpreted. For years, agricultural income was mostly tax-free, allowing farmers and landowners to operate without much interference. However the new Bill is shaking things up. While actual farming activities will still be exempt from tax, certain other types of income linked to agriculture are expected to come under scrutiny.

The Finance Ministry has also proposed a restructuring of provisions in the new income tax Bill by increasing the number of sections and limiting the overall length of the law book. The ITB is expected to comprise 536 sections, which are spread over 23 chapters and 16 schedules.

Experts welcome this change as a notable attempt to simplify and improve the understanding of the Income Tax Act which eliminates technically complex terms such as ‘Provisos’ and ‘Explanations’ from sections. Additionally the Bill also has key information presented in a tabular format.

A Clearer Definition of Agricultural Income

Says CA (Dr.) Suresh Surana, “The meaning of “agricultural land” as contained in the Income Tax Act, 1961 was quite complex as it was in a paragraph format. However, under the ITB, an effort has been made to tabulate certain parts of the wordings, to make the meaning of “agricultural land” easier to comprehend.”

The new Bill lays out exactly what counts as agricultural income. Here’s a look at the components of agricultural income which are still ‘tax-free’:

• Rent or revenue from land used for farming.

• Income directly from agriculture, like cultivating crops.

• Proceeds from the sale of produce with only basic processing (like cleaning or drying).

• As long as the land is not used for farming purposes, owning a building on agricultural land also incurs no tax

• Any income earned from growing saplings or seeds in a nursery

What is NOT ‘Tax-free’ Under ITB 2025

• Any ‘rental income’ earned from agricultural land used for housing or commercial purposes

• Income from selling agricultural land in specified urban areas.

What Has Changed For Agricultural Income?

The ITB states that while actual farming activities would still be exempted from tax, certain other types of income linked to agriculture are now under stringent watch. Here’s what has changed;

1. Cultivation of Land: If you are growing crops or are engaged in traditional farming, you still would be in the clear since such income is tax-free. However individuals need to provide proper records and documents to prove that they are actually farming to remain ‘tax-free’.

2. Renting Agricultural Land: Prior to the tabling of the new Bill, if an individual earned rent from agricultural land, it was exempted from taxes. However as per the ITB 2025, the rental income will be taxed if the land is situated in an urban area. The difference can be understood as the ‘urban land leasing no longer qualifies as agricultural income’.

3. Processing Agricultural Produce: The agricultural income of individuals who are involved in the basic processing activities such as drying or cleaning of produce remains tax-free. However, if the person adds any extra value such as making packed products then the government will consider the income derived from the same as ‘taxable’.

4. Income From a Nursery: An individual running a nursery must know that traditional nursery income continues to be tax-free in the new Bill. However, any large-scale commercial nurseries will now have to pay tax.

5. Dairy, Poultry, and Fisheries: The ITB stipulates that income from dairy farming, poultry, and fisheries will no longer be considered an ‘agricultural income’. This means that income generated from any of these farming methods will be taxable per the new Bill.

6. Agro-industries: The ITB potentially cuts down tax benefits for agro-industries. According to some reports, small-scale agribusinesses still get some perks but larger companies will have to pay higher taxes.

What Do These Changes Mean?

For many years, it was observed that wealthy individuals and companies utilised the loopholes within ‘agricultural income’ clauses to claim tax exemptions on income that wasn’t actually agricultural in nature. However, the new Bill aims to curb the use of such loopholes, ensure that the actual meaning of ‘agricultural income’ is communicated to taxpayers and real farmers stand a chance to benefit from the tax breaks.