There are various rules surrounding agricultural land tax. Rural agricultural land is exempt from tax when sold, while capital gain tax applies to urban agricultural land. The classification of land depends on population size and distance. In certain states, local government approval is required to sell agricultural land to non-farmers.
Agricultural Land Tax Rule: On February 13, Finance Minister Nirmala Sitharaman introduced the Income Tax Bill 2025. This bill includes changes to several existing provisions and introduces new ones. The government’s goal is to simplify and clarify the income tax law. Notably, the bill now treats dairy, poultry, and fish farming as non-agricultural income, subject to taxation.
After these updates in the Income Tax Bill, many are curious about agricultural land taxes. There’s a common belief that agricultural land sales are tax-exempt, but various conditions apply. If you’re planning to buy or sell agricultural land, it’s important to understand these rules to avoid financial losses. Tax exemptions are not applicable to all agricultural land. Some types of land are subject to tax on sale, while others are not.
Types of Agricultural Land:
There are two types of agricultural land: rural agricultural land and urban agricultural land. Rural agricultural land refers to land outside the boundaries of a municipality or cantonment. Additionally, the land’s classification depends on the population of the area and its distance from municipal limits.
Distance Formula Based on Population:
- If the population of a municipality or cantonment is between 10,000 and 1 lakh, the agricultural land must be at least 2 km away to be considered rural.
- For populations between 1 lakh and 10 lakh, the land must be at least 6 km away.
- If the population exceeds 10 lakh, the distance must be at least 8 km.
Income from the sale of rural agricultural land is exempt from tax.
How is Distance Measured?
The distance is measured in a straight line, not considering the road length, as roads are often winding. If the road is poorly connected, it could mistakenly place the land within the urban boundary, which is why the straight-line distance rule is applied.
Tax on Urban Agricultural Land:
Land not classified as rural agricultural land falls under urban agricultural land. Taxation for urban agricultural land is determined by the population size, as mentioned above.
- If the land is sold within 2 years, the profit will be treated as Short Term Capital Gain (STCG) and taxed according to the landowner’s income tax slab.
- If sold after 2 years, the profit is treated as Long Term Capital Gain (LTCG), taxed at 12.5%. (If indexation applies, the tax rate is 20%.)
State Laws:
State laws are crucial in this regard. Selling agricultural land to non-farmers requires local administration approval in most states. For instance, in Maharashtra and Gujarat, selling agricultural land to non-farmers is restricted under certain conditions, and local government approval is mandatory. Furthermore, each state imposes a land ceiling, meaning a person can only hold a certain amount of agricultural land.
