UPSC Prelims 2025 Q5: Indian Economy – Taxation

UPSC Prelims 2025, General Studies Paper I · Indian Economy

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?

(a) Both Statement I and Statement II are correct and Statement II explains Statement I
(b) Both Statement I and Statement II are correct but Statement II does not explain Statement I
(c) Statement I is correct but Statement II is not correct
(d) Statement I is not correct but Statement II is correct

Answer: (d) Statement I is not correct but Statement II is correct

Explanation

Agricultural Income - Tax Treatment:

Income Type	Tax Treatment	Capital Gains?	Examples
Basic Agriculture (crop cultivation)	Mostly EXEMPT or lower rates	Not applicable	Growing crops, farming
Allied Agricultural	TAXABLE at normal rates	Not applicable	Poultry, dairy, wool, fishery
Agricultural Land Sale	Not applicable	EXEMPT - rural agri land is NOT a capital asset	Land sold by farmers

Statement I: FALSE. Allied agricultural activities (poultry, dairy, wool, fishery) are TAXABLE — only basic crop cultivation gets exemptions.

Statement II: CORRECT. Rural agricultural land is NOT classified as a capital asset under Section 2(14) of the Income Tax Act.

Gains from rural agri land sales are NOT subject to capital gains tax.

Answer: (d) Statement I is not correct but Statement II is correct.

Why each option is right or wrong

(a) Incorrect. Statement I is false — allied agricultural income IS taxable at normal rates. Statement II is true but this option wrongly calls Statement I correct.
(b) Incorrect. Statement I is factually wrong about allied activity exemptions.
(c) Incorrect. This reverses the facts — Statement I is false, Statement II is true.
(d) CORRECT. Statement I is wrong (allied agri income = taxable, not exempt). Statement II is correct (rural agri land = not a capital asset, so no capital gains tax).

Key point

Allied agri income (poultry, dairy, wool) = TAXABLE. Rural agricultural land = NOT a capital asset = no capital gains tax on sale.

Remember

Allied agri income (poultry, dairy, wool) = TAXABLE. Rural agri land sale = NO capital gains tax (not a capital asset).

Common mistakes

Assuming ALL agricultural income gets tax exemption. Only basic crop farming has exemptions — allied activities (poultry, dairy) are taxable at normal rates.
Confusing income tax exemption (does NOT apply to allied activities) with capital gains tax exemption (DOES apply to agri land sales).
Not knowing that rural agricultural land is excluded from the definition of capital asset under Section 2(14) of the Income Tax Act.

Exam tip

Agriculture tax in three layers: (1) Crop cultivation = exempt. (2) Allied activities (poultry, dairy, wool) = taxable. (3) Rural agri land sale = no capital gains tax. Memorise all three separately.

Sources

Income-tax Act, 1961 - Section 2(1A) (Agricultural Income definition and exemptions)
Income-tax Act, 1961 - Section 2(14) (Capital Asset definition, agricultural land explicitly excluded)
NCERT Class XII - Economics (Taxation and Fiscal Policy)
Central Board of Direct Taxes - Circular 786 on Agricultural Income

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