TaxSaral
Rule 270Agricultural Incomewas Rules 7 / 7A / 7B / 8 in IT Act 1961

Rule 270 — Separating Farm Income from Factory Profit

When a farmer processes their own agricultural produce in their own business (e.g., sugarcane → sugar, groundnuts → oil), income must be split using Rule 270. The farming portion — Fair Market Value (FMV) of raw produce minus cultivation cost — remains exempt agricultural income. The processing profit — sale price minus FMV minus manufacturing cost — is taxable business income.

Who this applies to

Farmers or agro-processors who grow produce and also manufacture it into a finished product in their own unit (sugarcane → sugar, groundnuts → oil, cotton → yarn, etc.).

Key Points

  • The Fair Market Value (FMV) of raw produce at the farm gate is the dividing line between exempt agri income and taxable business income.
  • Exempt agri income = FMV of raw produce − cultivation cost.
  • Taxable business income = Sale price of processed product − FMV of raw produce − cost of processing.
  • If you sell produce raw (without processing), the full profit is agricultural income — Rule 270 only applies when you process in your own factory.

Worked Example

1

The Sugarcane Split — Mr. Amar's crop

Scenario

Mr. Amar grows sugarcane. 40% of his crop (worth ₹12L at market) is sold raw to traders. 60% is sent to his own sugar factory where cane (FMV ₹25L) is converted into sugar (sold for ₹30L). Cultivation costs: ₹6L for direct-sale portion, ₹15L for factory portion. Manufacturing expenses: ₹1.5L.

Calculation

── 40% DIRECT SALE (raw) ──────────────────────
Sale proceeds:          ₹12,00,000
Less cultivation cost: – ₹6,00,000
Agri income (exempt):   ₹6,00,000 ✓

── 60% FACTORY PROCESSING ────────────────────
Step A — Farming portion (Rule 270):
  FMV of raw sugarcane:   ₹25,00,000
  Less cultivation cost: – ₹15,00,000
  Agri income (exempt):   ₹10,00,000 ✓

Step B — Manufacturing portion:
  Sugar sale proceeds:    ₹30,00,000
  Less FMV of cane:      – ₹25,00,000
  Less mfg expenses:     – ₹1,50,000
  Business income (taxable): ₹3,50,000

──────────────────────────────────────────────
Total Agri Income (exempt): ₹16,00,000
Total Business Income (taxable): ₹3,50,000

Result

Mr. Amar's ₹16L farming income is completely exempt. Only his ₹3.5L manufacturing profit is taxable as business income. Without Rule 270, the entire ₹42L receipts could be taxed — Rule 270 protects the genuine agricultural value at each stage.

Related Sections

Section 2(5) + Section 11Agricultural Income — Definition & Full Exemption
Rule 271Rule 271 — Fixed Splits for Tea, Coffee & Rubber
Schedule 2 + IT Rules (Partial Integration)Partial Integration — How Agricultural Income Raises Your Tax Bracket

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Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative — verify with a Chartered Accountant before filing.