Selling farmland can be tax-free, or it can leave you with a large tax bill. The difference comes down to one test: is the land rural or urban under the Income-tax Act? This guide explains capital gains tax on agricultural land in plain words — the rural-urban test, the tax rates for urban land, the Section 54B exemption, TDS, and where to report the sale in your return.
Capital gains tax on agricultural land applies only to urban agricultural land. Rural agricultural land is not a capital asset, so its sale attracts no capital gains tax. Urban land held over 24 months pays 12.5% long-term tax without indexation, and Section 54B can remove the tax entirely if you buy new farmland within two years.
Quick answer
- Rural agricultural land is not a capital asset. Its sale attracts no capital gains tax.
- Urban agricultural land is taxable. Held over 24 months, the gain is long-term and taxed at 12.5% without indexation. Held for 24 months or less, the gain is short-term and taxed at your slab rate.
- Section 54B can save the whole tax if you buy new agricultural land within 2 years of the sale.
- TDS at 1% applies when the sale price is Rs 50 lakh or more, and only for urban land.
- Report an urban sale in Schedule CG of your return. For a rural sale, disclosing it under Schedule EI (exempt income) is the safer practice many advisors suggest.
Is capital gains tax charged on agricultural land?
Only on urban agricultural land. Rural agricultural land is left out of the definition of a capital asset by Section 2(14)(iii) of the Income-tax Act, 1961. Since there is no capital asset, there is no capital gain to tax.
This surprises many sellers. They assume all farmland is tax-free, or that all land sales are taxed. Neither is true. The law draws the line on location, not on whether you farmed the land. Revenue records matter too: land recorded as agricultural land that has not been converted to non-agricultural use keeps its character even if no farming happened on it in recent years.
How do I check whether my agricultural land is rural or urban?
Use the distance test in Section 2(14)(iii). Measure the aerial distance from the limits of the nearest municipality or cantonment board, and check that body’s population:
| Land location | Population of nearest municipality | Status |
|---|---|---|
| Inside the municipality limits | 10,000 or more | Urban — a capital asset |
| Beyond the limits, up to 2 km away | 10,000 to 1 lakh | Urban — a capital asset |
| Beyond the limits, more than 2 km away | 10,000 to 1 lakh | Rural — not a capital asset |
| Beyond the limits, up to 6 km away | 1 lakh to 10 lakh | Urban — a capital asset |
| Beyond the limits, more than 6 km away | 1 lakh to 10 lakh | Rural — not a capital asset |
| Beyond the limits, up to 8 km away | Above 10 lakh | Urban — a capital asset |
| Beyond the limits, more than 8 km away | Above 10 lakh | Rural — not a capital asset |
In short: land inside a town of 10,000 or more people is urban. Land outside town limits is rural only if it sits beyond 2 km, 6 km, or 8 km, depending on the town’s population. If your land fails the distance test, it counts as urban and its sale is taxable.
Check the population figure from the last published census for that municipality, and keep a location certificate or revenue record that shows the distance. If the tax department questions the claim, these papers settle it.
What tax applies to urban agricultural land?
The holding period decides the rate. Land is a long-term capital asset when held for more than 24 months, as per Section 2(42A) of the Act. Shorter holding means short-term gain. For the general LTCG and STCG rates that apply across assets, see our capital gains tax guide for 2026.
| Holding period | Type of gain | Tax rate |
|---|---|---|
| More than 24 months | Long-term | 12.5% without indexation |
| 24 months or less | Short-term | Your income-tax slab rate |
Two extra points matter. First, the 12.5% rate without indexation comes from the Finance Act 2024 and applies to transfers on or after 23 July 2024. Second, if you bought the land before 23 July 2024 and you are a resident individual or HUF, you may choose the older method instead — 20% with indexation — if that works out lower. Compare both before you file; the choice is made at filing time.
Surcharge and 4% health and education cess apply on top of the tax, as they do for other capital gains.
What changed, and what stayed the same?
Before 23 July 2024, long-term gains on land were taxed at 20% with indexation. After that date, the rate became 12.5% with no indexation, with the 20%-with-indexation option kept only for resident individuals and HUFs who bought before the cut-off date. The rural-urban test itself did not change. Section 54B did not change either.
The Income-tax Act, 2025 applies to transfers from 1 April 2026 and renumbers several sections. Current guides map Section 2(14) to Section 2(22) and Section 54B to Section 83 of the 2025 Act. Transfers up to 31 March 2026 follow the 1961 Act numbers used in this article. The rules themselves — the distance test, the 2-year farming use, and the 2-year reinvestment window — remain the same in substance.
How can I save tax on the sale of agricultural land under Section 54B?
Section 54B is the main exemption for farmland sellers. It works for both short-term and long-term gains, which makes it wider than most other capital gains exemptions. It is open only to individuals and HUFs — companies and firms cannot use it.
You must meet all of these conditions:
- The land sold must be urban agricultural land. Rural land needs no exemption because it is already outside capital gains tax.
- Two years of farming use. The land must have been used for agricultural purposes by you, your parents, or your HUF for at least 2 years before the sale.
- Buy new agricultural land within 2 years after the sale. The new land can be rural or urban, and it need not be in the same district or state.
- Exemption amount. The exemption is the lower of the capital gain and the amount you invest in the new land, including any amount deposited in the Capital Gains Account Scheme (CGAS).
- If you have not bought before filing your return, deposit the unutilised gain in a CGAS account before the return filing due date, then use it to buy land within the 2-year window.
- Hold the new land for 3 years. If you sell it within 3 years of purchase, the exemption is withdrawn and the earlier gain becomes taxable in the year of that sale.
Keep the sale deed of the old land, proof of farming use, and the purchase deed of the new land. These three documents prove the claim if the department asks.
What other exemptions can cut the tax?
If Section 54B does not fit your plan, two other routes can still reduce the bill. You can combine them with 54B, as long as the total exemption does not exceed the gain.
Section 54EC — bonds up to Rs 50 lakh
Invest the capital gain, up to Rs 50 lakh, in specified bonds issued by NHAI, REC, or PFC within 6 months of the sale. The money stays locked for 5 years. Only the gain invested is exempt; any gain above Rs 50 lakh stays taxable.
Section 54F — buy a residential house
If you invest the net sale proceeds in one residential house in India, part or all of the gain can be exempt. The house-sale exemption itself is explained in our Section 54 guide for house sales. The house must be bought within 1 year before or 2 years after the sale, or constructed within 3 years. The exemption is worked out in proportion: capital gain multiplied by the amount invested, divided by the net sale proceeds, with the relief capped where the house cost exceeds Rs 10 crore. You must not own more than one residential house (other than the new one) on the date of sale. If you sell the new house within 3 years, the exemption is withdrawn.
Is TDS applicable on the sale of agricultural land?
Yes, but only for urban land and only above a threshold. Under Section 194IA, the buyer must deduct tax at 1% when the sale price is Rs 50 lakh or more. The buyer deposits the tax and issues Form 16B as the TDS certificate. The full 194IA process, including Form 26QB filing, is covered in our TDS on property purchase guide.
Rural agricultural land is outside this rule because it is not a capital asset. No TDS applies on its sale, whatever the price.
As the seller, check that the deducted tax shows up in your 26AS and AIS before you file. The TDS is not an extra tax — it is a credit against the final tax on the gain. If the buyer did not deduct tax when they should have, the liability for the shortfall sits with the buyer, but you still pay tax on the gain itself in your return.
Where do I report the sale in my ITR?
- Urban land sale: Report the gain in Schedule CG (Capital Gains) of your return, after claiming 54B, 54EC, or 54F relief.
- Rural land sale: There is no capital gain to report. Many advisors still suggest disclosing the sale under Schedule EI (Exempt Income), so the transaction sits on record and does not draw a query later.
- Farming income itself stays exempt under Section 10(1) and is also shown in Schedule EI. The sale of the land and the income from farming it are two separate matters.
Worked example — urban land held for 7 years
You bought urban agricultural land for Rs 20 lakh on 1 January 2019 and sold it for Rs 60 lakh on 1 March 2026. You held it for over 7 years, so the gain is long-term.
- Capital gain = Rs 60 lakh − Rs 20 lakh = Rs 40 lakh.
- Tax at 12.5% = Rs 5 lakh.
- Add 4% cess = Rs 20,000.
- Total tax = Rs 5,20,000, before any exemption.
Now suppose you buy new agricultural land for Rs 30 lakh within 2 years and claim Section 54B. The exemption is the lower of the gain (Rs 40 lakh) and the investment (Rs 30 lakh), so Rs 30 lakh. The taxable gain falls to Rs 10 lakh, the tax to Rs 1,25,000, and with cess to Rs 1,30,000. You save Rs 3,90,000.
Note that this land was bought before 23 July 2024, so as a resident individual you could also compare the 20%-with-indexation method and pick whichever gives the lower tax.
Common mistakes to avoid
- Assuming all farmland is tax-free. Run the distance test first. Land near a growing town often turns urban without the owner realising it.
- Missing the 2-year purchase window under 54B. A late purchase loses the exemption in full.
- Forgetting the CGAS deposit. If you have not bought before the return due date, park the gain in CGAS on time.
- Selling the new land within 3 years. The old exemption comes back as taxable income.
- Using the wrong schedule. Urban gains go in Schedule CG; a rural sale, if disclosed, goes in Schedule EI.
- Ignoring TDS on a Rs 50 lakh-plus sale. Match Form 16B with your 26AS and AIS.
- Mixing up 54B and 54F. Section 54B is for new farmland; Section 54F is for a residential house, with different conditions and a proportional formula.
- Skipping documents. Sale deed, farming-use proof, and the new purchase deed are what prove the claim.
Frequently asked questions
Is capital gains tax charged on agricultural land?
Capital gains tax applies only to urban agricultural land. Rural agricultural land is not a capital asset under Section 2(14)(iii), so its sale does not attract tax.
Is rural agricultural land exempt from capital gains tax?
Yes. Since rural agricultural land is not a capital asset, no capital gain arises on its sale, and no tax is due. Disclosing the sale under Schedule EI is still a sensible step for a clean record.
How do I check whether my agricultural land is rural or urban?
Use the distance test. Find the nearest municipality’s population and the aerial distance from its limits to your land. Beyond 2 km for a town of 10,000 to 1 lakh people, beyond 6 km for 1 lakh to 10 lakh, and beyond 8 km for above 10 lakh, the land is rural. Anything closer, or inside the limits, is urban.
How can I save tax on the sale of agricultural land under Section 54B?
Buy new agricultural land within 2 years of the sale, after using the old land for farming for at least 2 years. The exemption equals the lower of your capital gain and the amount you invest. Individuals and HUFs can use it for both short-term and long-term gains.
What is the time limit to buy new agricultural land under Section 54B?
You must buy the new land within 2 years after the sale date. If you have not bought before your return filing due date, deposit the unutilised gain in the Capital Gains Account Scheme before that date and use it within the 2-year window.
Is TDS applicable on the sale of agricultural land?
TDS at 1% under Section 194IA applies only when the sale price is Rs 50 lakh or more and the land is urban. The buyer deducts it and issues Form 16B. No TDS applies on the sale of rural agricultural land.
Official sources
- Income-tax Department, e-filing portal: https://www.incometax.gov.in/
- Income-tax Act provisions and guides: https://www.incometaxindia.gov.in/
- India Code, statute text of the Income-tax Act: https://www.indiacode.nic.in/
Reviewed by Asuthod Rathod, CA — this guide was checked for accuracy against the Income-tax Act provisions cited above.
Last updated: 1 November 2026
Disclaimer: This article explains tax rules in general terms and is not personal tax advice. Rates, limits, and section numbers can change with Finance Acts and notifications. Check the e-filing portal or speak to a chartered accountant before acting on a large transaction.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.