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UPSC Prelims 2025, Question 5

The concept being tested: Income Tax Act, 1961 - exemptions on agricultural income and rural agricultural land capital asset classification.

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?

Options

  1. ABoth Statement I and Statement II are correct and Statement II explains Statement I
  2. BBoth Statement I and Statement II are correct but Statement II does not explain Statement I
  3. CStatement I is correct but Statement II is not correct
  4. DStatement I is not correct but Statement II is correctCorrect answer

The answer: Statement I is not correct but Statement II is correct

The Income-tax Act, 1961 defines agricultural income narrowly under Section 2(1A) as rent or revenue from land, income from agricultural operations performed on that land, and income from farm buildings used for agriculture. Allied activities such as poultry farming and wool (sheep) rearing involve no operation upon land - no tilling, sowing, or cultivation - so income from them is ordinary business income and is fully taxable, not exempt. That makes Statement I incorrect. Separately, Section 2(14), which defines capital asset for capital gains purposes, expressly excludes agricultural land situated in rural India (outside the specified municipal, cantonment, and population-linked distance limits). Since rural agricultural land falls outside the definition of capital asset, its sale attracts no capital gains tax, so Statement II is correct. The two statements rest on different provisions of the Act, one on income exemption and the other on capital asset classification, so neither explains the other.

What UPSC was testing

UPSC is testing whether aspirants know that agricultural income under Section 2(1A) requires an actual operation on land, so poultry and wool rearing, though rural and agriculture-adjacent, remain taxable business income rather than exempt agricultural income. The paired-statement format tempts test-takers to assume both statements about agriculture must stand or fall together, when they in fact rest on two separate provisions, Section 10(1) income exemption and Section 2(14) capital asset classification.

How often this comes up

This concept has appeared 5 times in UPSC Prelims General Studies Paper I between 2015 and 2025 — in 2016, 2018, 2021, 2022 and 2025.

The option-by-option autopsy for this question — why each of the other three is wrong, and which neighbouring concept each one was built from — is in the app.