Is Tax Payable When You Sell Agricultural Land? Rural vs Urban Farmland Under the Income-tax Act, 2025

Farmers and landowners along the Yamuna Expressway often ask whether selling farmland is taxed. The answer turns on a single question: is the land rural or urban agricultural land, as defined in the income-tax law? The Income-tax Act, 2025 (in force from 1 April 2026) kept the old test but renumbered almost every section. This guide uses the new numbers.

The rural/urban test

Under Section 2(22)(iii) of the Income-tax Act, 2025, agricultural land in India is excluded from the definition of capital asset: unless it is:

1. inside a municipality (including a municipal corporation, notified area committee, town area committee or “by any other name”) or cantonment board with a population of at least 10,000; or
2. within these aerial distances of such a municipality or cantonment board:

“Population” means the population as per the last census whose figures were published before the start of the tax year. Distances are measured aerially (in a straight line) not by road.

What this means near Jewar

Census 2011 figures for statutory towns in Gautam Buddh Nagar give an idea of how the test applies:

On those figures, a town such as Jewar (population above 10,000 but below 1 lakh) would make agricultural land within 2 km of its limits urban, if a Nagar Panchayat is treated as a municipality for this purpose, the definition’s words “or by any other name” suggest it is, but we found no ruling on the point. Bilaspur, below 10,000, would not.

Development authority areas are a grey area. Noida and Greater Noida were census towns, not statutory towns, in 2011, and in 2018 the Supreme Court held (in a different context) that NOIDA is not a “municipality”. Whether land inside a development authority’s area (including YEIDA’s) is “within a municipality” for this test has not, as far as we found, been decided. Treat this as a question for your tax adviser, with the exact location of your khasra and the municipal limits measured properly.

If the land is urban: capital gains

• Holding period. Land held for more than 24 months is a long-term capital asset.
• Rate. Long-term gains are taxed at 12.5% (Section 197). Resident individuals and HUFs selling land acquired before 23 July 2024 can instead pay 20% with indexation, if lower.
• Reinvestment relief: Section 83 (formerly 54B). An individual or HUF selling land that they (or a parent) used for agriculture in the two years before the sale is exempt to the extent the gain is reinvested in agricultural land within two years. Any amount not reinvested by the return due date must be deposited in a notified capital-gains account scheme; the new land should not be sold within three years.

If the land is acquired

• Urban agricultural land acquired compulsorily. Schedule III, item 18 (formerly Section 10(37)) exempts the capital gains of an individual or HUF where the land was used for agriculture in the previous two years and the transfer is a compulsory acquisition (or consideration approved by the Central Government or RBI).
• Awards under the 2013 Act. The Finance Act, 2026 added an exemption for income from an award or agreement for compulsory acquisition of land under the Right to Fair Compensation Act, 2013 (other than under its Section 46), applying, per the Budget memorandum, to acquisitions from 1 April 2026. See our guide to land acquisition and compensation in the YEIDA area.

TDS: what the buyer deducts

• The 1% TDS on property purchases of ₹50 lakh or more (Section 393(1)) does not apply to agricultural land, but for this purpose “agricultural land” means rural agricultural land only. A buyer of urban agricultural land should deduct it.
• Compensation for compulsory acquisition of property other than agricultural land attracts 10% TDS above ₹5 lakh, but not where the award is exempt under the 2013 Act.
• Payments to a non-resident seller follow different rules. See NRIs buying and selling plots.

Income from farming the land is agricultural income and is exempt; that is separate from the sale of the land itself.

Common questions

Please verify before you sell. Tax law is detailed and fact-specific, and the new Act is recent. This is general information, not tax advice, consult a chartered accountant with the exact location and history of your land.

Selling or buying farmland on the Yamuna belt? Talk to our team.