What is Composite Agricultural Income?

Composite Agricultural Income refers to income that is partly agricultural (exempt from tax) and partly business (taxable). It typically arises when a person grows agricultural produce and also processes or manufactures it into a marketable product.

📌 Practical Examples:

• Example 1: A tea estate owner grows tea leaves (agricultural activity) and also runs a factory to process those leaves into packaged tea (business activity). The income from growing is exempt, but the income from processing is taxable.
• Example 2: A farmer cultivates coffee beans and also cures (dries and processes) them before selling. This is considered a composite activity and taxed accordingly under Rule 7B or Rule 8.
• Example 3: A rubber plantation owner collects latex (natural rubber) and runs a small unit to manufacture rubber sheets or tyres. Part of the income is agricultural, and part is business income.
• Example 4: A farmer grows tomatoes and uses them to make packaged tomato ketchup in a food processing unit. This case falls under Rule 7, and the income is split accordingly.

Composite income is not fully exempt—only the agricultural portion is. Understanding the split between the two helps ensure correct income tax treatment.

Taxation of Composite Income

Composite income consists of two parts: (i) Agricultural Income – which is exempt from tax under Section 10(1) of the Income Tax Act, and (ii) Business Income – which is taxable under the regular income tax provisions.

📌 Practical Examples of Taxation Rules:

• Tea (grown and manufactured): Rule 8 applies. 60% is treated as agricultural income (exempt), and 40% as business income (taxable).
• Coffee (grown and cured): Rule 7B applies. 75% is agricultural income, and 25% is taxable.
• Coffee (grown, cured, roasted and ground): Rule 7B still applies, but the split changes to 60% agricultural and 40% business income.
• Rubber (grown and manufactured): Rule 7A applies. 65% is agricultural and 35% business income.
• Processed Products (Rule 7 examples):
• Potato chips made from potatoes: Agricultural income = market value of potatoes - cost of cultivation; the rest is business income.
• Gudd (jaggery) made from sugarcane juice: Agricultural income = market value of sugarcane - cost of cultivation; remaining income from jaggery manufacturing is business income.
• Tomato ketchup made from tomatoes: Agricultural income = market value of tomatoes - cost of cultivation; the rest is business income.
• Fruit juices made from fresh fruits: Agricultural income = market value of fruits - cost of cultivation; income from processing is business income.
• Cotton ginned and baled from raw cotton: Agricultural income = market value of cotton - cost of cultivation; ginning and baling income is business income.
• Rice processed from paddy: Agricultural income = market value of paddy - cost of cultivation; milling and packaging income is business income.

It's important to apply the correct rule to ensure proper reporting and tax treatment. If the manufacturing or processing uses agricultural produce as input (like fruits, vegetables, cotton), Rule 7 may apply.

Only the portion of income directly attributable to agricultural operations is exempt. Any added value through industrial processing or packaging is considered business income and taxed accordingly.

Understanding Rule 7

It's important to apply the correct rule to ensure proper reporting and tax treatment. For example, under Rule 7, if you manufacture or process agricultural produce (like fruits, vegetables, or cotton), the agricultural income is calculated as:

Agricultural Income = Market Value of Agricultural Produce - Cost of Cultivation
Business Income = Total Income - Market Value of Agricultural Produce - Industrial Expenses

Practical example:
Suppose you make potato chips:
- Market Value of Potatoes (raw material): ₹2,00,000
- Cost of Cultivation: ₹80,000
- Industrial Expenses (processing, packaging): ₹50,000
- Total Income from potato chips business: ₹4,00,000

Then:
Agricultural Income = ₹2,00,000 - ₹80,000 = ₹1,20,000 (Exempt from tax)
Business Income = ₹4,00,000 - ₹2,00,000 - ₹50,000 = ₹1,50,000 (Taxable)

Important Notes for Taxpayers

• Agricultural income is exempt from tax but is included to determine the tax rate on non-agricultural income (rate calculation under Section 115B).
• Composite income rules vary by product; selecting the correct rule (e.g., Rule 7, 7A, 7B, 8) is essential for accurate tax reporting.
• Rule 7 requires input of market value and cost of cultivation to split income correctly between agricultural and business portions.

📌 Practical Calculation Example:

A sugarcane farmer produces jaggery (gudd):

Market Value of Sugarcane: ₹3,00,000
Cost of Cultivation: ₹1,20,000
Industrial Expenses (processing jaggery): ₹70,000
Total Income from jaggery business: ₹5,00,000

Agricultural Income = ₹3,00,000 - ₹1,20,000 = ₹1,80,000 (Exempt)
Business Income = ₹5,00,000 - ₹3,00,000 - ₹70,000 = ₹1,30,000 (Taxable)

Note: The agricultural income ₹1,80,000 will be added for calculating the tax rate applicable to the taxable business income.