Agricultural Income Tax in India 2026: Why Farm Income Is Exempt but Can Still Raise the Tax on Your Salary

By Nitish Bharadwaj · Published Sep 28, 2026 · 7 min

Agricultural income, such as crop sales or rent from farmland in India, is exempt under Section 10(1). It is not taxed itself, but if it exceeds ₹5,000 and your other income is above the basic exemption limit, it is added in to work out the rate on your other income. This is called partial integration, and it can raise your tax sharply. Dairy, poultry and fisheries are not agricultural income. Farm income above ₹5,000 means filing ITR-2 or ITR-3, and above ₹5 lakh you must give land details.

"Farm income is tax-free" is one of the best-known rules in Indian tax, and it is true. What most people miss is the second half: if you also earn a salary, a business income or rent, farm income can quietly push up the tax on that other income. Here is how the exemption works for FY 2025-26 (AY 2026-27), and when it costs you.

What Counts as Agricultural Income

Section 2(1A) of the Income-tax Act, 1961 defines agricultural income narrowly. It must come from land in India that is used for agriculture. It covers three things: rent or revenue from such land, income from farming it, including basic processing to make the produce fit for the market, and income from farm buildings used for those operations. Section 10(1) exempts all of it.

Growers who also process their crop are taxed on a fixed split under the Income-tax Rules. For tea grown and manufactured by the seller, 60% is agricultural income and 40% is taxed as business income. For rubber, the split is 65% and 35%. For coffee grown and cured, it is 75% and 25%, and 60% and 40% if the grower also roasts and grinds it.

Partial Integration: How Exempt Income Raises Your Tax

The tax law does not tax farm income directly. It uses it to find the rate on your other income, so that someone earning ₹20 lakh, half from farming, does not pay the same low rate as someone earning only ₹10 lakh. This method, called partial integration, applies to individuals and HUFs when both conditions are met:

• Net agricultural income for the year is more than ₹5,000
• Non-agricultural income is above the basic exemption limit

1. Add farm income to your other income and work out the tax on the total.
2. Add farm income to the basic exemption limit and work out the tax on that figure.
3. Subtract the second from the first. Add 4% cess to the result.

The ₹3 lakh of farm income is not taxed itself, yet it adds ₹49,400 to the bill because it pushes part of the salary into the 30% slab. In the old regime, the basic exemption is ₹3 lakh for those aged 60 to 79 and ₹5 lakh for those 80 and above, so the numbers change for senior citizens.

Farm income does not change the choice between regimes much, because it is exempt in both. Your deductions still decide it, as our old vs new regime guide for salaried employees explains.

Which ITR to File and What to Disclose

If your agricultural income is ₹5,000 or less, you can still use ITR-1. Above that, you must file ITR-2, or ITR-3 if you also have business income. Farm income goes in Schedule EI, which lists exempt income. See our comparison of ITR-1 and ITR-2 for the other conditions.

When net agricultural income exceeds ₹5 lakh, the return asks for details of each piece of land. You must give the district and PIN code, the area in acres, whether you own or lease it, and whether it is irrigated or rain-fed. The tax department uses these details to check large claims. Money routed through fake farm income is a common target, so keep evidence ready.

• Land records such as the khatauni, 7/12 extract or jamabandi in your name, or a lease deed
• Mandi sale receipts, APMC bills or buyer invoices for the produce
• Bank statements showing the sale proceeds and your farm expenses
• Bills for seeds, fertiliser, labour and irrigation, since only net income is exempt

Selling Agricultural Land

Gains from selling farmland are not agricultural income, but rural farmland is not a capital asset at all, so selling it is tax-free. Land counts as urban if it lies within a municipality with 10,000 or more people, or within set distances of one. The limit is 2 km for towns of 10,000 to 1 lakh people, 6 km for 1 lakh to 10 lakh, and 8 km for bigger cities, measured in a straight line.

Urban farmland is a capital asset, and the gain is taxable. You can still save tax under Section 54B if you or your parents used the land for farming in the two years before the sale and you buy other farmland within two years. The exemption is limited to the lower of the gain and the amount you reinvest. It works much like the home-sale exemptions in our Section 54 and 54F guide.