Buyers investing in agricultural land must adhere to state-specific rules

Some states allow only agriculturists to buy, while others require outsiders to secure approval prior to purchase

A leading actor’s daughter is facing legal trouble over her purchase of agricultural land outside Mumbai, according to media reports. The plot was originally earmarked for agricultural use and could not be transferred without obtaining the requisite permissions and completing paperwork, which was not done. Investors planning to invest in agricultural land outside major cities to benefit from their expansion must tread with caution.

 

City’s growth drives prices up

 

Buying land on the outskirts of cities with a 10-year horizon can be rewarding. “Urbanisation creates demand and leads to appreciation in the value of land on the outskirts of major cities,” says S G Raja Sekharan, wealth management expert and author of 'How To Get Rich and Retire Early', which dwells at length on investing in agricultural land. 

An added advantage of investing in agricultural land is diversification into one more asset class. “The investors could also enjoy the benefits of various incentives and subsidies offered by the government. They could also enjoy tax savings under the rules applicable to agricultural income,” says Santhosh Kumar, vice chairman, ANAROCK Group.

 

Zoning laws changes can impact value

 

Buyers who decide to foray into this asset class should be aware of its limitations and risks. “There are strict limitations on how agricultural land can be used,” says Kumar.

 

It is also one of the most illiquid asset classes. “Investors who want to sell and exit quickly may find it difficult to do so,” says Kumar.

 

Changes in zoning laws can have a significant impact on a land parcel’s value. If new zoning rules impose stricter limits — such as prohibiting conversion to non-agricultural purposes, or earmarking the land for a green belt — its potential for appreciation declines.

 

Encroachment is another concern, particularly in the case of high-value farmland outside large urban centres. “Investors must build a boundary wall and employ full-time guards to protect their holding against this menace,” says Raja Sekharan. If the land is classified as agricultural, compensation in the event of government acquisition may be lower.

 

Another problem arises due to the widespread use of cash in land transactions. “Finding buyers or sellers willing to transact entirely in white money is difficult,” says Raja Sekharan.

 

Investing in rural (as opposed to urban) farmland may not generate as high returns. “Here, appreciation would depend on development, if any, and on inflation,” says Raja Sekharan.

 

Title disputes and other hurdles

 

Title disputes are common in agricultural land. Extended family members often raise ownership claims.

 

Many land parcels lack clean documentation, especially if past owners were illiterate. “About 70–80 per cent of properties in India have flawed documentation when traced back 10–20 years,” says Raja Sekharan. He adds that legally clean farmland is difficult to find and it requires time, money, and legal effort to verify the title.

 

“The absence of mutation records increases risk. Pending litigation may cloud ownership rights,” says Asha Kiran Sharma, partner, King Stubb & Kasiva, Advocates and Attorneys.

 

Sellers often make false promises of imminent regularisation or conversion.

 

Buyers need to check whether non-agriculturists are permitted to buy a particular piece of land. “If not, they should obtain prior permission from the authorities,” says Sharma.

 

Tenancy and ceiling laws add to risks. “Transactions without the collector’s approval can impair the validity of the purchase,” says Anuja N Mukerji, partner, AQUILAW.

 

Encumbrances such as mortgages, court attachments, or acquisition notices may also hinder ownership.

 

Foreign Exchange Management Act (FEMA) guidelines impose another layer of restriction. Non-resident Indians (NRIs) and foreigners cannot purchase agricultural land unless they inherit it or obtain special authorisation from the government.

 

Adhere to state laws

 

State laws can pose further hurdles. “Restrictions under state laws may block ownership,” says Shweta Tiwari, associate partner, IndiaLaw.

 

The rules governing the purchase of agricultural land vary considerably across states. “Many states do not let people who are not farmers or do not have a farming history acquire farmland, unless they can show proof of eligibility or get special permission,” says Kumar.

 

“In Maharashtra and Gujarat, only agriculturists can buy, while non-agriculturists need prior approval from the collector. In West Bengal, there are no restrictions, subject to ceiling limits and land use conditions. In Himachal Pradesh, outsiders cannot buy farmland without state sanction. In Nagaland, customary laws restrict ownership to the Naga tribes. Karnataka recently liberalised its laws, allowing non-agriculturists to buy farmland, subject to income and ceiling conditions,” says Mukerji.

 

Pay the right price

 

Buyers must check the prices at which recent transactions took place to ensure they are paying the right price. “The price you pay should be in line with market trends. Negotiate to ensure that you get a good price,” says Raja Sekharan.

 

The choice of location is crucial. “Make sure the land parcel is likely to be included in future development plans of the city,” says Raja Sekharan. He adds that land within 10 km of the boundary of a metro is likely to gain in value as the city expands.

 

He suggests that land must be held for at least 10 years to generate meaningful returns.

 

Thorough title check is a must

 

Investors must confirm they are eligible to purchase the land. They must also ensure that the title and ownership are clear.

 

According to Sharma, prospective buyers should carefully verify land records, encumbrance certificates, and conversion permissions.

 

“The ‘other rights’ column in the 7/12 extract may reveal tenancy or statutory restrictions,” says Mukerji.

 

Tiwari suggests doing a physical survey of the land before purchase.

 

Given the long horizon required, agricultural land investment may be better suited for younger investors who can afford the long wait.

Agricultural land taxation: Must-know points for investors

 

Rural agricultural land is not a capital asset; urban agricultural land is taxable

Rural agricultural land’s transfer lies outside the scope of capital gains tax

Urban agricultural land’s transfer is subject to capital gains tax

Period of holding: More than 24 months, LTCG levied; 24 months or less, STCG levied

STCG taxation: Taxed at individual’s slab rate; no indexation benefit

LTCG taxation: 12.5% without indexation (post July 23, 2024 purchase) or 20% with indexation (pre July 23, 2024 purchase) plus surcharge and cess

Exemptions: Available under Sections 54B, 54F, and 54EC, subject to conditions

Conversion effect: If rural land comes under municipal limits, it becomes urban and taxable; conversion itself does not trigger tax unless accompanied by transfer