Selling agricultural land in India can be entirely tax-free under specific conditions, as rural agricultural land is not considered a capital asset under the Income-tax Act. This exemption, however, applies only when the land meets strict distance and population criteria set by law.
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When Rural Agricultural Land is Exempt from Tax
The exemption applies to land located outside municipal or cantonment board limits, where the population—as per the last census—is less than 10,000. If the population threshold is crossed, the land must meet certain minimum distance requirements to qualify as rural.
Distance and Population Criteria
- Population between 10,000 and 100,000: The land should be at least 2 km away from municipal or cantonment board limits.
- Population between 100,000 and 1 million: The minimum distance increases to 6 km.
- Population above 1 million: The land must be situated at least 8 km away from municipal or cantonment board limits.
Importantly, distance is measured as a straight-line path—not road distance—to ensure accuracy and avoid circumvention.
Tax Rules for Urban Agricultural Land
If the land does not meet the rural criteria, it is classified as urban agricultural land and becomes subject to capital gains tax.
- Short-term capital gains: If sold within two years, gains are taxed according to the seller’s income slab rate.
- Long-term capital gains: If sold after two years, gains are taxed at 12.5% without indexation.
A special provision applies for land purchased before July 23, 2024, allowing sellers to still avail the 20% long-term capital gains rate with indexation. Brokerage and legal fees can be deducted to reduce taxable gains.
State Laws and NRI Restrictions
Selling agricultural land to non-agriculturists in many states requires prior approval from the local authority. These rules, including land ownership limits, differ across states.
For Non-Resident Indians (NRIs), the Reserve Bank of India’s (RBI) approval is necessary to purchase agricultural land in India. However, NRIs are permitted to inherit such land without prior permission.
Implications
Experts say these rules encourage genuine agricultural activity in rural areas while curbing speculative real estate investments near urban limits. Sellers, especially those close to municipal boundaries, must verify population data and exact distances before concluding transactions to ensure tax compliance.
Read More: ICSI Demand Ignored: New Income Tax Bill Introduced, No Change in ‘Accountant’ Clause
Mariya is the Senior Editor at Juris Hour. She has 5+ years of experience on covering tax litigation stories from the Supreme Court, High Courts and various tribunals including CESTAT, ITAT, NCLAT, NCLT, etc. Mariya graduated from MLSU Law College, Udaipur (Raj.) with B.A.LL.B. and also holds an LL.M. She started as a freelance tax reporter in the leading online legal news companies like LiveLaw & Taxscan.
