Taxation of Agricultural Income under Charitable Trusts under the Income Tax Act, 1961

In our country, still a large percentage of the population, especially in the rural areas, is dependent on agriculture for their income. Interestingly, agricultural income earned by charitable trusts is usually exempt from tax under the Income Tax Act, 1961. To avail of the exemption, the trusts ought to ensure that they comply with the provisions for exemptions provided under Section 11 of the Income Tax Act.  

What do you mean by agricultural income?

 By virtue of Section 2 (1A ) of the Income Tax Act, income derived from land situated in India that is used for agricultural purposes, the income from the sale of agricultural produce grown on such land, and also the income derived from farmhouses connected to agricultural land, subject to specific conditions, is considered as agricultural income.

Agricultural income, as per this definition, is exempt from tax under Section 10(1) of the Income Tax Act. The income earned from poultry farming, fish farming, bee-keeping, etc. does not fall under the ambit of agricultural income according to the above-mentioned section.

Tax Exemptions on Agricultural Income for Charitable Trusts under the Income Tax Act, 1961

 The agricultural income that is earned by the charitable trusts are completely exempt from the purview of taxation under the Income Tax Act. This clause ensures that income derived from agricultural activities, such as cultivating land, selling produce grown on agricultural land, or earnings from farmhouses connected to such land, remains tax-free. This exemption shows that agricultural income is outside the ambit of central taxation and falls within the control and jurisdiction of state governments.

 Agricultural income earned by a charitable trust is fully exempt under Section 10(1). This exemption applies even if the trust is not claiming benefits under Section 11, as long as the income qualifies as agricultural income under Section 2(1A).

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This exemption applies independently of the trust’s eligibility for benefits under Section 11 of the Income Tax Act. While Section 11 provides tax exemptions for charitable and religious trusts when they meet certain conditions, such as utilizing 85% of their income for charitable purposes, agricultural income does not require these additional qualifications. As long as the income satisfies the definition of agricultural income under Section 2(1A), it remains exempt from taxation. This ensures that trusts engaged in agricultural operations can continue their charitable work without additional financial burdens.

How to claim exemptions?

In order to claim exemptions under Section 11, the trust must use at least 85% of its total income, including agricultural income, for charitable purposes during the financial year. If this income is not utilized for charitable objectives and remains as surplus, the trust may lose its exemption for that portion of income under Section 11 of the act. For availing the exemptions provided under Sections 10(1) and 11, the trust must be registered under Section 12A or 12AB of the Income Tax Act.

Trusts will undoubtedly generate income from both agricultural and non-agricultural sources. In these cases, the income must be divided, and the agricultural component remains exempt under Section 10(1), whereas the non-agricultural part is taxed like any other income.

It is important to note that the trusts that earn agricultural incomes should file their income tax returns using Form ITR-7 if their total income exceeds the basic exemption limit.

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The Income Tax Act has laid down a mechanism to indirectly tax agricultural income. This method or concept may be called the partial integration of agricultural income with non-agricultural income. It basically aims at taxing the non-agricultural income at higher rates of tax.

Thus, the charitable trusts must ensure that the income they claim as agricultural genuinely arises from activities that meet the legal definition of agriculture. Any misrepresentation or erroneous classification of income may result in an investigation or re-assessment proceedings and denial of the exemption. Benefiting from this provision allows trusts to direct more resources towards their charity goals while also contributing to India's larger goals of agricultural growth and social welfare. Also, if the trust engages in agricultural activities as a business rather than for charitable purposes, it may not qualify for exemptions.

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