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Unit 4: Exemptions and Deductions - I

On the other hand, a tax deduction is a reduction of a taxpayer’s total income that decreases the Notes
amount of money used in calculating the tax due. Essentially, it’s a break granted by the
government that reduces taxes by a percentage that is dependent upon the income bracket of the
taxpayer.
Tax is calculated on the income earned in the previous year. For providing relief to the tax
payers from payment of tax, income tax law provisions contains concept of exemption and
deduction. Exempted income means the income which does not at all charged to any taxes, while
calculating the Gross Total Income.
Under Section 10 of the Income Tax Act, various items of income are totally exempt from
income-tax. Therefore, these incomes are not included in the total income of an assessee. Section
10 provides that in computing the total income of a previous year of any person, any income
falls in its ambit shall not be included in the total income, provided the assessee proves that a
particular item of income is exempt and falls within a particular clause. The onus is on the
assessee i.e. the assessee has to prove that his income falls under Section 10.
After going through this unit, you will learn the income which does not form part of the total
income, the conditions to be satisfied for availing exemption under Section 10.

4.1 Agricultural Income

Agricultural income as defined in Section 2(1A) is exempt from income tax in the case of all
assesses. This exemption has been granted on account of the constitutional provisions relating
to the powers of the Central and the State Governments for levying tax on agricultural income.
Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to
taxes on agricultural income to the State Legislature. However while computing tax on
non-agricultural income agricultural income is also taken into consideration.
As per section 2(1A) of the Act, agricultural income means any income which includes the
following:
1. Rent received from the land used for agricultural purposes: When a person (landlord or
tenant) lets out a piece of land, which is situated in India, for agricultural purposes, the
rent received either in cash or kind from the tenant is considered as agricultural income.
2. Revenue income derived from agriculture: When the landlord or tenant cultivates the farm,
raises the product and sells it or appropriates it for his individual needs, the difference
between the cost and selling price (including the value of self consumption on the basis of
average market rate for the year) is the income derived from agriculture.
3. Income from making the produce fit to be taken to market: The crop as a harvested might
not find a market. If, in order to make the product a saleable commodity, the cultivator or
receiver of rent-in-kind performs some operation (manual or mechanical) and enhances
the value of the produce, the enhancement of value of the produce is also agriculture
income. Such income to be regarded as agricultural income, the following conditions
must be satisfied:
The operation must be one which is ordinarily employed by the cultivator to make
the produce fit for market, i.e., threshing, winnowing, cleaning, drying, etc.

There is no market (ready and willing and not a theoretical market) for the produce
as received from the farm.

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