As already discussed, there is no tax on agricultural income but if an assessee has nonagricultural income as well as agricultural income, such agricultural income is included in his Total Income for the purpose of computation of Incometax on nonagricultural income. This is also known as partial integration of agricultural income with nonagricultural income or indirect way of taxing agricultural income.
Such partial integration is done only in the case of:

individual;

HUF;

AOP/BOI;

Artificial juridical person.
It is not done in the case of:

firm;

company;

cooperative society;

local authority.
The partial integration is done to compute the tax on nonagricultural income only when the following two conditions are satisfied:

nonagricultural income of the assessee exceeds the maximum exemption limit which is Rs. 2,50,000 in the case of an individual (other than individual of the age of 60 years or above) and HUF, etc.; and

the Net Agricultural Income exceeds Rs. 5,000.
Computation of tax where there is agricultural income also:
The following steps should be followed to calculate the tax:
Step 1: Add agricultural income and nonagricultural income and calculate tax on the aggregate as if such aggregate income is the Total Income.
Step 2: Add agricultural income to the maximum exemption limit available in the case of the assessee and compute tax on such amount as if it is the Total Income.
Step 3: Deduct the amount of incometax as computed under Step 2 from the tax computed under Step 1.
The amount so arrived at shall be total Incometax payable by the assessee.
Step 4: Claim rebate under section 87A if applicable.
Step 5: Add surcharge if applicable + education cess and SHEC @ 3%.
Example :
Gross Total Income of Mr. Dust aged 50 years as computed under Incometax Act, for the assessment year 201819 is Rs. 3,00,000. He deposits Rs. 20,000 in a PPF account.
Compute the tax payable by Mr. Dust assuming that he has agricultural income of

Nil;

Rs. 5,000; and

Rs. 3,50,000.
Solution:
In Case of a & b
(a) and (b) Since the agricultural income is either Nil or does not exceed Rs. 5,000, there will be no partial integration and the Incometax will be calculated on Rs. 2,80,000 (Rs. 3,00,000 – 20,000 deduction u/s 80C) as usual.
Tax on Rs. 2,80,000 will be Rs. 1,500 – Rs. 1,500 (Rebate u/s 87A) = NIL.
In Case of (c) : Rs. 3,50,000 (Agricultural Income)
Particulars 
Amount (Rs.) 
Step1 

Aggregate of agricultural and nonagricultural income (Rs. 3,50,000 +Rs. 2,80,000) 

Tax on Rs. 6,30,000 
38,500 
Step2 

Add Rs. 2,50,000 (Maximum exemption limit) to agricultural income of Rs. 3,50,000 

Tax on Rs. 6,00,000 
32,500 
Step3 

Deduct Tax under Step 2 from Tax under Step 1 (Rs. 38,500 – Rs. 32,500) 
6,000 
Therefore, tax on nonagricultural income 
6000 
Less: Rebate u/s 87A 
2,500 

3,500 
Step4 

Add: Education cess & SHEC – @ 3% 
105 
Therefore, total tax payable 
3,610 
