Budget 2024: Agriculture income to be considered while determining tax slab under new tax regime

The Interim Budget 2024 has introduced a clarification concerning the taxation of agricultural income under the new tax regime. The clarification aims to address the computation of tax slabs for individual and Hindu Undivided Family (HUF) taxpayers who possess both regular and agricultural income. This change is particularly significant as it aligns the treatment of agricultural income with the provisions of the new optional tax regime introduced in 2020.

According to the prevailing provisions of the Income Tax Act, agricultural income has been exempted from taxation. The taxation for individual and HUF taxpayers is typically calculated based on applicable slab rates. In scenarios where an individual or HUF taxpayer earns both regular and agricultural income, the exempt agricultural income is factored into the determination of the applicable income slab. For instance, if an individual has a business income of Rs 8 lakh and agricultural income of Rs 10 lakh, the tax slab is set at 30% due to the total income exceeding Rs 10 lakh. However, the tax is calculated only on the business income of Rs 8 lakh, preventing the individual from availing a double benefit.

Vishwas Panjiar, Partner at Nangia Andersen LLP, highlighted that while this practice has been in existence, it was not explicitly articulated in the “new” optional tax regime introduced in 2020 for individuals and HUFs. The Interim Budget seeks to rectify this by explicitly incorporating the computation mechanism for agricultural income within the optional tax regime. “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. The Budget proposes to explicitly include the above computation mechanism for the purpose of the optional tax regime as well. To be honest, this is more of a clarificatory amendment and should be viewed as such as this brings parity between the regimes,” explains Panjiar.

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The Finance Bill states “the income-tax chargeable shall be computed as follows:—(i) the total income and the net agricultural income shall be aggregated and the amount of income-tax shall be determined in respect of the aggregate income at the rates specified in the said Paragraph A or sub-section (1A) of section 115BAC, as if such aggregate income were the total income.”

In essence, this budgetary clarification ensures a consistent approach in treating agricultural income for taxation purposes, bringing coherence between the existing tax regulations and the provisions of the optional tax regime.