TaxSaral

Section 2(5) + Section 11 · was Section 2(1A) + Section 10(1) in the 1961 Act

Agricultural Income — Definition & Full Exemption

Agricultural income is completely exempt from income tax under Section 11 read with Schedule 2. To qualify, income must fall within one of the four categories defined in Section 2(5): agricultural produce, nursery income, agricultural land rent, or rural dwelling/warehouse rent used for agricultural purposes.

Who it applies to: Farmers, landowners renting agricultural land, nursery operators, and any individual or HUF earning rural land-based income.

Key points

  • Nursery income — growing and selling plants — qualifies 100% as agricultural income with no bifurcation required.
  • Rent from agricultural land qualifies regardless of whether the land is in a rural or urban location.
  • Rent from a dwelling house or warehouse qualifies ONLY if the unit is in a Rural Area AND is used for agricultural purposes.
  • Agricultural produce sold directly (unprocessed) is fully exempt. If you process it in your own factory, Rule 270 bifurcation is required to separate the farming and manufacturing portions.

Worked examples

1. Nursery vs. processed produce — two different treatments

Padma runs a plant nursery (sells seedlings and potted plants — ₹8L/year) and also grows sugarcane which she processes into jaggery in her own unit (total sale ₹20L).

Nursery income: ₹8,00,000
  → 100% agricultural income, fully exempt
  → No bifurcation required

Sugarcane (processed into jaggery):
  → Rule 270 bifurcation required
  → FMV of raw sugarcane − cultivation cost = Agri income (exempt)
  → Jaggery sale − FMV of cane − processing cost = Business income (taxable)
  (see Rule 270 entry for detailed calculation)

Result: Padma's nursery income (₹8L) is entirely exempt — no rule needed. Her jaggery business requires Rule 270 bifurcation because she processes her own produce. The two activities are treated completely differently.

2. Agricultural land rent — urban vs. rural

Rajan owns two parcels. Parcel A: farmland on the outskirts of Pune city limits, rented at ₹3L/year for cultivation. Parcel B: a godown in his village rented to a grocery store at ₹1.2L/year.

Parcel A (agricultural land rent):
  → Qualifies under Section 2(5) regardless of urban location
  → ₹3,00,000 fully exempt

Parcel B (village godown, rented to grocery store):
  → Dwelling/warehouse rent qualifies ONLY if used for agricultural purposes
  → Grocery store is not agricultural use → does NOT qualify
  → ₹1,20,000 taxable as House Property income

Result: Rajan's urban farmland rent (₹3L) is fully exempt. His village godown rent (₹1.2L) is taxable because the tenant uses it commercially, not agriculturally. The use of the building matters, not its rural location alone.

Related sections

Not sure how Section 2(5) + Section 11 applies to you? Ask a question or browse all sections.

Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative; verify with a Chartered Accountant before filing.