Rule 7A of Income Tax Act: Complete Guide Tax treatment of party agriculture and partly non-agricultural income, partly agricultural and non-agricultural income as per rules 7, 7A, 7B,8. So in this guide, we will discuss the 7A income tax rules. For disintegrating a composite business income which is partly agricultural and partly non-agricultural, the following rules are applicable:
Income Non-agricultural Income Agriculture Income Tax Rule Growing and manufacturing tea in India 40% 60% Rule 8 Sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India 35% 65% Rule 7A The sale of coffee grown and cured by the seller 25% 75% Rule 7B(1)
Income from growing and manufacturing of any product other than tea.
The tax treatment of income from growing and manufacturing of any product other than tea is governed by Rule 7 of the Income Tax Rules 1962.
From such agricultural receipts, expenses such as cultivation expenses, etc., insured in connection with such recipient will be deducted, and the balance will be agricultural income, which will be exempt.
For eg in the case above, if the market value of the potatoes grown by the company, which have been used for the purposes of making its own wafers, is Rs. 5lakhs and the cost of cultivation of such potatoes is Rs. 4 lakhs, the agricultural income shall be Rs.1 lakh (Rs.5 lakhs – Rs.4 lakhs). This agricultural income of Rs.1 lakh shall be exempt.
Further, for computing business income from the sale of wafers produced from such potatoes, the company shall be allowed a deduction of 5 lakhs as the cost of potatoes, being the market value of potatoes grown by it.
Income From Growing and Manufacturing of Rubber The tax treatment of income from growing and manufacturing of rubber in India is governed by Rule 7A of the Income Tax Rules 1962.
Income From Growing Rubber Income from manufacturing rubber is considered business income and is fully taxable.
Important Points
The taxpayers can claim a deduction for expenses incurred in growing and manufacturing rubber, such as the cost of seeds, fertilisers, pesticides, labor, and machinery.
The taxpayers can also claim a deduction for the cost of planting new bushes and replacing bushes that have died or became permanetly useless. Taxpayers will be required to maintain accurate records of income and expenses incurred in the cultivation and manufacture of rubber.
Income from Growing and Manufacturing of Coffee The tax treatment of income from growing and manufacturing of coffee in India is governed by rule 7B the income tax rules 1962.
Income from Growing Coffee Income from growing coffee is considered agricultural income and is exempt from income tax in India, subject to certain conditions. However, 25% of the income from growing coffee is treated as business income and is taxable.
Rule 7B provides for the following tax treatment of income from growing and manufacturing of coffee:
Income from the sale of coffee grown and cured by the seller in India.
25% of such income shall be deemed to be income liable to tax.
Income from the sale of coffee grown, cured, and roasted and ground by the seller in India
40% of such income shall be deemed to be income liable to tax.
Example:
Suppose a taxpayer grows and manufactures coffee in India. In the financial year 2023-24, the taxpayer's income from the sale of coffee is Rs. 100 crore. The taxpayer's income from growing coffee will be Rs. 60 crore (60% of Rs. 100 crore), and the taxpayer's income from manufacturing coffee will be Rs. 40 crore (40% of Rs. 100 crore).
The taxpayer's income from growing coffee will be exempt from income tax, but 25% of the taxpayer's income from growing coffee will be treated as business income and will be taxable. The taxpayer will also have to pay income tax on the taxpayer's income from manufacturing coffee.
Important Rules The taxpayer may deduct all the expenses for growing and manufacturing coffee, including seeds, fertilisers, pesticides, labor, and machinery.
A taxpayer can also deduct the replacement cost of bushes that die or have become permanently useless by planting new bushes.
The taxpayer will have to maintain proper record in income and expenses incurred in growing and manufacturing coffee.
Suggested Read: Section 44AA of the Income Tax Act Explained
Income from Growing and Manufacturing of Tea Rule 8 Income from Growing Tea Income from Tea cultivation is agricultural income and is exempted from tax under the Income-tax Act in India on certain conditions. But 40% of such income from Tea cultivation is considered business income and is liable to tax.
Rule 8 of the Income Tax Rules, 1962
Important Points The taxpayer is eligible to take a deduction for expenses incurred while growing and manufacturing tea, which includes seeds, fertilizers, pesticides, worker, and machines.
The taxpayer will also get a tax deduction for the expenses involved in the process of planting new bushes to replace the dead ones that are no longer useful.
The taxpayer will have to maintain proper records of income and expenses incurred in growing and manufacturing tea.
Suggested Read: Section 133(6) of the Income Tax Act
FAQs What is Rule 7A? Rule 7A provides for equitable taxation by distinguishing between the agricultural portion of income and the manufacturing portion because production is done through both processes.
Is the agricultural part of Rule 7A completely tax-exempt? Yes. This 65% income from agriculture is exempt from income tax.
But if your income other than agricultural income exceeds the basic exemption limit, your agricultural income can also be assessed for taxation.
Does Rule 7A apply where rubber is grown but not further processed? If rubber is raised but not processed, the total income is considered to be agricultural income. It is exempt from tax.
Does income from tea and coffee plantations fall under Rule 7A? No. They are regulated independently:
Rule 8 – Tea
Rule
Rule 7B – Coffee
Who is eligible to apply to Rule 7A: individuals only, or companies as well? Rule 7A applies to every taxpayer, and these taxpayers include
Individuals, HUFs, businesses, and companies as long as they can develop and produce rubber by themselves.
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