Capital Gains on Agricultural Land: Rural vs Urban, the Distance Test and the Reinvestment Exemption
Selling rural agricultural land attracts no capital gains tax, because the Income-tax Act doesn't treat it as a capital asset. Land counts as rural if it lies outside any municipality or cantonment of 10,000 people or more and beyond a band of 2, 6 or 8 km, measured in a straight line, around towns with larger populations. Inside those limits it's urban agricultural land, taxed like any plot.
Key takeaways
- Rural farmland is outside the definition of capital asset in section 2(22) of the Income-tax Act, 2025 (old section 2(14)(iii)). No gain, no tax, no TDS.
- The distance band grows with the town's population: 2 km up to 1 lakh people, 6 km up to 10 lakh, 8 km above that.
- Urban farmland is taxed as a capital gain, but reinvesting in new farmland within two years can exempt it under section 83 (old 54B), if you or your parents farmed it for two years before the sale.
- Compensation for compulsory acquisition under the 2013 land acquisition law is tax-free, and the 2026 Finance Act wrote that into the Act itself.
- A buyer deducts 1% TDS on urban farmland worth Rs 50 lakh or more, never on rural farmland.
Rural or urban: the distance test
The test is about location and population, not what the land looks like. Agricultural land is a capital asset, and so taxable on sale, if it lies:
| Population of the municipality or cantonment | Land counts as urban if it is |
|---|---|
| 10,000 or more | Anywhere inside its limits |
| More than 10,000, up to 1 lakh | Within 2 km of its limits |
| More than 1 lakh, up to 10 lakh | Within 6 km of its limits |
| More than 10 lakh | Within 8 km of its limits |
Farmland outside every one of these bands is rural. Three details decide borderline cases:
- Distance is aerial. It's the straight-line distance from the municipal boundary, not the road distance. A plot 7 km by road can be 5 km as the crow flies.
- Population comes from the census. It's the figure in the last census published before the year of sale, not today's estimated population.
- Every nearby town counts. Land can be well outside a big city's 8 km band and still inside a small town's 2 km band. Check all municipalities and cantonments around you, including newly notified ones.
A land surveyor or the tehsil office can certify the distance. Get it in writing before the sale; it's your evidence if the return is questioned. Our guide to land measurement units in India helps when the deed uses bigha, kanal or guntha.
Is it still agricultural land?
The distance test only helps if the land is agricultural in the first place. In Sarifabibi Mohmed Ibrahim v. CIT (1993), the Supreme Court looked at land shown as agricultural in the revenue records that hadn't been cultivated for years and was sold to a housing society, which began building within days. The Court held it wasn't agricultural land when sold, and taxed the gain. The factors are weighed together: revenue entries, actual cultivation, whether conversion to non-agricultural use was applied for, and what the buyer did next.
So land already converted for residential or commercial use, or sold with conversion clearly under way, is taxed as ordinary land wherever it lies. Keep the khasra or 7/12 entries, crop records and any land revenue receipts. Our guide on checking land records online covers the state portals.
Where the law sits now
| What it covers | Income-tax Act, 2025 | Old 1961 Act |
|---|---|---|
| Rural farmland is not a capital asset | Section 2(22) | Section 2(14)(iii) |
| Reinvesting in farmland | Section 83 | Section 54B |
| Compulsory acquisition of farmland, and awards under the 2013 land law | Section 11 with Schedule III | Section 10(37), plus section 96 of the 2013 Act |
| Stamp duty value as sale price | Section 78 | Section 50C |
| TDS by the buyer, 1% | Section 393(1) | Section 194-IA |
| TDS on acquisition compensation, 10% | Section 393(1) | Section 194LA |
Selling urban farmland: tax and the section 83 exemption
Urban farmland is taxed like any other land. Held more than 24 months, the gain is long-term at 12.5%, or 20% with indexation for a resident individual or HUF who acquired it before 23 July 2024. If the stamp duty value is more than 110% of the price, section 78 treats the stamp duty value as the price.
Section 83 lets an individual or HUF escape tax by buying other agricultural land. The conditions:
- The land sold was used for agriculture by you or your parents (or, for an HUF, by the HUF) for two years immediately before the sale.
- You buy new agricultural land within two years of the sale. The exemption is the lower of the gain and the amount invested.
- It covers short-term gains as well as long-term ones.
- Money not invested by your return's due date goes into a Capital Gains Account Scheme deposit.
- If you sell the new land within three years, its cost is reduced by the exemption you claimed, so the tax comes back on that sale.
Check your state's rules before planning a farmland purchase: several states restrict who may buy agricultural land, which can make the reinvestment impossible for a non-farmer. NRIs can't buy it at all, as our note on whether an NRI can buy agricultural land explains.
A worked example
You bought farmland in 2012-13 for Rs 20 lakh and have cultivated it since. It lies 4 km from the limits of a town of about 3 lakh people, inside the 6 km band, so it's urban. You sell in 2026-27 for Rs 1.5 crore. The CII was 200 for 2012-13 and is 384 for 2026-27. Tax includes 4% cess, no surcharge.
| Scenario | Taxable gain | Tax |
|---|---|---|
| 12.5%, no indexation | Rs 1,30,00,000 | Rs 16,90,000 |
| 20%, indexed cost Rs 38,40,000 | Rs 1,11,60,000 | Rs 23,21,280 |
| 12.5%, after buying new farmland for Rs 1 crore (section 83) | Rs 30,00,000 | Rs 3,90,000 |
| Same land 7 km away, outside the band (rural) | Nil | Nil |
| Land acquired under the 2013 land acquisition law | Exempt | Nil |
Over a long holding at high appreciation, the flat 12.5% beats indexation, so compute both. And 3 km of location is worth Rs 16.9 lakh here, which is why the distance certificate matters.
Compulsory acquisition: tax-free compensation
When the government acquires land, two routes to exemption apply.
Farmland under Schedule III. The old section 10(37), now section 11 read with Schedule III, exempts an individual's or HUF's gain on compulsory acquisition of urban agricultural land that they or their parents farmed for the two years before, including enhanced compensation received later.
Any land under the 2013 Act. Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 says no income tax is levied on an award or agreement under it, except cases under its section 46. CBDT Circular 36/2016 confirmed this applies even without a matching clause in the Income-tax Act, and covers non-agricultural land too. The Finance Act 2026 amended Schedule III to exempt such income expressly for acquisitions on or after 1 April 2026.
Acquisition under another law, or a voluntary sale to a development authority outside these statutes, may not qualify. Read the award before assuming the money is tax-free. News of acquisitions for projects like New Noida shows how large these payouts get.
TDS when farmland is sold
- Rural farmland: no TDS. The 1% TDS under section 393(1) excludes rural agricultural land.
- Urban farmland: the buyer deducts 1% where the consideration is Rs 50 lakh or more, calculated on the higher of the price and the stamp duty value.
- Compensation: 10% TDS applies to compulsory acquisition payouts above Rs 5 lakh a year for property other than agricultural land, and not where the award is exempt under the 2013 Act.
A buyer who wrongly deducts TDS on rural land leaves you chasing a refund, so settle the classification in the agreement. For the rules on buying land in the first place, see plots vs apartments.
Frequently asked questions
How do I prove my agricultural land is rural?
Get a certificate from the tehsildar or a licensed surveyor stating the aerial distance from the nearest municipal or cantonment limits, and note the population of each nearby town from the last published census. Keep the revenue records showing agricultural use and crop entries. Put these with your return papers; they answer a notice if the tax department argues the land was urban.
Is the sale of rural agricultural land shown in the income tax return?
It isn't a capital gain, so there's nothing to tax, but it's sensible to disclose the receipt where the return asks for exempt income. A registered sale leaves a record, and a clear disclosure backed by the sale deed and distance certificate makes any later query easy to answer. Your CA can advise which schedule to use.
Can I claim section 83 if I bought the land only a year ago?
Yes, if the land was used for agriculture by you or your parents for the two years before the sale. That condition is about use, not your ownership period, and section 83 covers short-term gains too. If you've owned it for a year and nobody in the family farmed it before that, the two-year use condition isn't met.
Is compensation for land taken for a highway taxable?
It depends on the law used. An award under the 2013 land acquisition law is exempt under its section 96, and for acquisitions from 1 April 2026 Schedule III says so expressly. If the award cites a different statute, the exemption isn't automatic, so check which law your award was made under before filing and take advice.
If you're selling farmland near a growing town and want to understand where it stands on the distance test, Realty Hunting can help you think through the options with your tax adviser.
