Consider the following statements:
- Statement-I: In India, income from allied agricultural activities like poultry farming and wool rearing in rural areas is exempted from any tax.
- Statement-II: In India, rural agricultural land is not considered a capital asset under the provisions of the Income-tax Act, 1961.
Which one of the following is correct in respect of the above statements?
Answer & explanation
Answer: (d) Statement I is not correct but Statement II is correct
Only 'agricultural income', which must come from land used for agriculture, is exempt. Poultry farming or wool rearing does not involve cultivating land, so its income is taxable like business income. Separately, section 2(14) excludes rural agricultural land from 'capital asset', so gains on selling it escape capital gains tax.
- ✗ Statement-I Section 2(1A) ties agricultural income to land in India used for agricultural purposes. Audit has treated even milk sales as dairy income, not income from agricultural land, so allied activities are taxable.
- ✓ Statement-II Section 2(14) excludes agricultural land from 'capital asset', except land within or near municipalities and cantonments of specified population (urban agricultural land).
- • Since then Since 1 April 2026 the Income-tax Act, 2025 has replaced the 1961 Act; PIB says the rewrite does not alter the underlying tax policy (PIB, 1 April 2026).
Remember · Exempt agricultural income must arise from land used for agriculture; poultry, dairy, wool are taxable. Rural agricultural land is not a capital asset, so no capital gains tax on it.
Sources
- CAG Report No. 9 of 2019 (Direct Taxes), Chapter V: Assessments relating to Agricultural income ↗ “As per section 2(1A) of the Income Tax Act, 1961 (the Act) ‘agricultural income’ means (a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes … As dry grapes (kismis) is an agro-based industrial product and milk is a dairy product, the income therefrom could not be considered as income derived from the agricultural land.”
- Memorandum explaining the provisions in the Finance Bill, 2013 (Direct Taxes) ↗ “define the term “capital asset” as property of any kind held by an assessee, whether or not connected with his business or profession. Certain categories of properties including agricultural land have been excluded from this definition.”
- PIB (Ministry of Finance), Income-tax Act, 2025 comes into force from today (1st April, 2026) ↗ “represents a comprehensive effort to simplify and modernise the country’s income-tax law, replacing the six-decade-old Income-tax Act, 1961.”
Question and answer: UPSC's official GS Paper I (2025, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·