Income Tax Rules 2002 allow cultivators and recipients of agricultural produce as rent-in-kind to claim market value deductions when using their produce in taxable businesses.

The Federal Board of Revenue (FBR) has clarified the tax treatment of agricultural produce used as raw material in businesses during Tax Year 2027.

According to Rule 11 of the Income Tax Rules, 2002, updated up to September 15, 2026, cultivators and recipients of agricultural produce as rent-in-kind can claim deductions for the market value of produce used as raw material in businesses chargeable to tax under the head ‘Income from Business’.

Valuation of agricultural produce

Under Rule 11, the market value of agricultural produce raised or received as rent-in-kind and used in a business shall be allowed as a deduction when calculating taxable business income.

The FBR has prescribed two methods for determining the market value.

Where agricultural produce is ordinarily sold in the market in its raw state or after processes normally undertaken by cultivators to make it marketable, its value will be determined according to the market price prevailing when the produce is used as raw material in the business.

In other cases, the market value will be calculated by adding the expenses of cultivation and land revenue or rent paid for the area where the produce is grown.

Restrictions on additional deductions

The FBR has clarified that no deduction will be allowed for other expenditure incurred by a cultivator or recipient of agricultural produce as rent-in-kind, except the market value deduction permitted under Rule 11.

The provision applies to individuals who use agricultural produce raised or received as rent-in-kind as raw material in businesses whose income is taxable under the business income category.

These rules apply to Tax Year 2027, covering July 1, 2026, to June 30, 2027.