Question 22 from UPSC CSE 2025 - Economics

Question

Consider the following statements:
1. In India, income from allied agricultural activities like poultry farming and wool rearing in rural areas is exempted from any tax.
2. 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?

Accepted Answer

Correct Option: D. Statement I is not correct but Statement II is correct

Strategy: First, recall how the Income Tax Act distinguishes agricultural income from allied activities. Statement I uses an all-encompassing term 'exempted from any tax' for poultry and wool rearing, but these do not qualify as 'agricultural income' per the Act, making this statement incorrect. Statement II connects directly to a well-known clause that exempts rural agricultural land from capital asset status—this is correct and factual. Once Statement II is validated and Statement I rejected, option D is the correct response.

Key Info: The Income-tax Act, 1961, strictly defines 'agricultural income' to include income from land used for agricultural operations such as crop cultivation, rent or revenue from agricultural land, and produce sales. Income from activities like poultry farming and wool rearing does not qualify as agricultural income and is taxable under 'business income' or 'other sources'. Exemptions for agricultural income do not extend to such allied activities. Section 2(14) of the Act defines 'capital asset', explicitly excluding rural agricultural land from the definition. Rural agricultural land refers to land situated outside designated municipal/cantonment boundaries with set population thresholds (not within urban limits as detailed in the Act). Thus, gains from sale of rural agricultural land are not treated as capital gains and are not taxable. However, urban agricultural land—that located within or near specified municipal limits—is considered a capital asset and subject to capital gains tax upon transfer. The distinction between rural and urban agricultural land is crucial for capital gains taxation policy in India.

Answer

Option A: Both Statement I and Statement II are correct and Statement II explains Statement I

Answer

Option B: Both Statement I and Statement II are correct but Statement II does not explain Statement I

Answer

Option C: Statement I is correct but Statement II is not correct