Understanding What Truly Qualifies as Agricultural Income Under Indian Law
By Prashant Kumar
Introduction
The term “agricultural income” is often misunderstood — especially among agritech startups and Farmer Producer Organisations (FPOs). Many assume that any revenue connected to agriculture is tax-free, but under Indian tax law, only specific income streams qualify for exemption.
As FPOs evolve beyond farming into processing, trading, logistics, and agri-tech services, understanding what’s actually exempt versus what’s taxable becomes essential. This clarity helps avoid tax notices, maintain compliance, and plan efficient financial structures.
Here’s what the Income Tax Act really says about tax exemptions for FPOs, Producer Companies, and Agritech entities in 2025.
What Is “Agricultural Income” Under the Income Tax Act?
Agricultural income under Section 10(1) of the Income Tax Act refers to income derived directly from land used for agriculture — including cultivation, harvesting, and sale of produce by the cultivator or landlord. Income from processing or trading is taxable unless it’s purely incidental to cultivation.
The Core Legal Definition (Section 2(1A)):
Agricultural income includes:
- Rent or revenue from agricultural land in India.
- Income from agriculture — i.e., cultivation, sowing, growing, and harvesting crops.
- Income from sale of agricultural produce grown by the assessee.
- Processing income, only if the process is necessary to make the produce marketable (e.g., cleaning or drying grain).
However, anything beyond these four points becomes taxable — especially when an FPO or agritech company adds business operations, branding, or value-added services.
What Is Actually Exempt for FPOs and Producer Companies
| Activity Type | Example | Tax Status | Legal Basis |
|---|---|---|---|
| Sale of member-grown crops | Aggregating and selling members’ paddy or vegetables | ✅ Exempt | Sec. 10(1) |
| Basic processing for members | Cleaning, grading, sorting | ✅ Exempt | Incidental to agriculture |
| Sale of purchased crops | Buying from non-members and reselling | ❌ Taxable | Business income |
| Branded sale or packaging | Selling under a proprietary label | ❌ Taxable | Business income |
| Input supply | Seeds, fertilizers, pesticides | ❌ Taxable | Trading activity |
| Agri-tech SaaS or services | Crop analytics, IoT, logistics | ❌ Taxable | Business service |
| Storage and warehousing | Cold storage or logistics | ❌ Taxable | Commercial activity |
Key takeaway:
Only income linked to direct agricultural activity of members is exempt. Everything else — even if related to agriculture — becomes taxable as business income.
Can Agritech Startups Claim Agricultural Income Exemption?
Not directly.
Agritech startups are usually service or technology providers — they don’t engage in actual cultivation or own agricultural land. Therefore, their revenues are taxable business income, even if derived from agricultural clients.
However, FPOs using technology for cultivation and record-keeping can still claim exemption for income directly arising from agricultural operations by members. The agritech component (platform fee, subscription, data analytics) remains taxable.
Hybrid Models: Partial Exemption Scenarios
Some FPOs and agri-tech ventures operate hybrid models — e.g., selling members’ produce and providing processing services.
In such cases:
- Maintain two separate ledgers: one for exempt agricultural income, one for taxable business income.
- File a single ITR (Form ITR-6) but disclose segregation in audit notes.
- Claim exemption under Section 10(1) only for verified agricultural activity backed by land records or member declarations.
Tax Planning and Compliance Tips for FPOs in 2025
- Segregate income streams — member vs. non-member activities.
- Avoid mixing processing and trading accounts.
- Register under GST for taxable operations like input sales or branded produce.
- File ITR-6 annually even if most income is exempt — it’s a compliance requirement under the Companies Act.
- Maintain documentary evidence (land ownership, crop records, member invoices) to substantiate exemption claims.
- Avoid using Section 80P by analogy — it applies to cooperatives, not FPOs.
How the MCA and Income Tax Departments View FPOs
Regulators increasingly expect corporate-style governance and transparent accounting from FPOs.
The Ministry of Corporate Affairs (MCA) verifies compliance through ROC filings (AOC-4, MGT-7A), while the Income Tax Department cross-checks declared exemptions during audits or SFAC grant evaluations.
To remain credible and funding-eligible, FPOs must align both their corporate compliance and taxation logic — ensuring that agricultural income exemptions are claimed ethically and defensibly.
Linked Reading
📘 How to Register an FPO in India – Step-by-Step 2025 Guide
📘 Post-Incorporation Compliance Checklist for FPOs (2025)
📘 SFAC Schemes and Funding Support for FPOs in India (2025)
📘 FPO Taxation and Accounting Rules in India (2025)
Together, these posts form the FPO Legal Series — India’s most comprehensive legal, financial, and compliance resource for Producer Companies.
About the Author
Prashant Kumar is a Company Secretary, Published Author, and Partner at Eclectic Legal, a full-service Indian law firm advising on corporate, regulatory, and transactional matters. He specialises in FPO structuring, agricultural law, and corporate compliance, helping farmer groups, startups, and agri-businesses build legally sound and sustainable organisations.
📩 prashant@eclecticlegal.com | ☎️ +91-9821008011
