Your land is agricultural. That is not the question asked in the assessment.
Thirty years of farming the same fields does not answer it. Three documents do, and none of them is about farming.
Most sellers of agricultural land are told the sale is tax free, and a good number of them are told correctly. The trouble is that the person saying it, and the person hearing it, are usually answering a question the law never asks.
In short
- Once the land is established to be agricultural land, whether the sale falls outside capital gains turns on a location test. How it was farmed, and for how long, does not enter into that test.
- Land inside municipal limits is caught only where that body's population is ten thousand or more. Below that figure the sale is outside the charge, inside the limits or outside them.
- Population comes from the last published census, which is still 2011, and distance is measured in a straight line, not by road.
- The registrar reports the sale. From 1 April 2026 the threshold is ₹45 lakh, by price or by stamp duty value, and it reaches your Annual Information Statement either way.
Start with what the exemption actually is
Two different things get muddled here, and separating them saves a great deal of trouble.
Agricultural income is exempt from tax. That is one rule. The sale of agricultural land is a different question altogether. Once the land is established to be agricultural land, whether the sale falls outside capital gains depends principally on where the land is situated, not merely on how long it has been cultivated.
And when land passes the location test, the result is stronger than an exemption. The land is simply not a capital asset, so there is no capital gain to compute at all. Nothing is being excused. The transaction is outside the charge.
The test, in three questions
Work through them in order. Most people skip the first one and go straight to measuring distances, which is where the wrong answers come from.
Three questions, in this order
The location test| Ask | Why it matters |
|---|---|
| Which is the nearest local body, and what kind is it? | The body must fall within the statutory description of a municipality, however named, whether as a municipal corporation, notified area committee, town area committee, town committee, or by any other name, or a cantonment board. |
| What was that body's population at the last published census? | Below ten thousand, the land is not a capital asset at all. At ten thousand or above, go on to the third question. |
| Is the land inside its limits, or how far outside? | Inside the limits it is a capital asset. Outside, only if it falls within the band for that population. |
Note whose population is being counted. It is the municipality's, throughout. Not the village's, and not the hamlet's. This is where most wrong self-assessments begin.
A family sells ancestral land lying inside the limits of a municipality of about six thousand people. The buyer's advocate says the land is inside a municipality, so capital gains must follow.
He is wrong. The Act catches land inside municipal limits only where that body has a population of not less than ten thousand. At six thousand, the land is not a capital asset, and the distance bands do not help the department either, because they only run from a body that has crossed the ten thousand mark. Inside the limits or outside them, the sale is outside the charge.
A settlement of two thousand people sits within a municipal corporation of nine lakh. The seller reasons that his village is tiny, so the land must be rural.
The figure that counts is the corporation's nine lakh, not his village's two thousand. That puts him in the six kilometre band. His land lies four kilometres outside the corporation's limits, which is inside that band, and the sale is taxable. Nothing about his village's size was ever relevant.
The distance bands
These apply only to land outside the limits, and only where the body has crossed ten thousand.
How far out the charge reaches
Land outside the limits| Population of that municipality or cantonment board | Land within this distance of the limits | Effect |
|---|---|---|
| More than 10,000 and up to 1,00,000 | 2 kilometres | Capital asset |
| More than 1,00,000 and up to 10,00,000 | 6 kilometres | Capital asset |
| More than 10,00,000 | 8 kilometres | Capital asset |
There is a quirk at exactly ten thousand that is worth knowing, because it can decide a file. For land inside the limits the Act says a population of not less than ten thousand, so exactly ten thousand is caught. The first distance band says more than ten thousand, so a body sitting at exactly that figure has no band at all, and land outside its limits is never reached by distance. Same number, two different answers, depending on which side of the boundary the land lies.
Which census, and why an old figure still governs
Population means the census figure, and not the town as anyone knows it today. That is not a matter of interpretation, because the Act says which census.
the last preceding census of which the relevant figures have been publishedIncome-tax Act, 2025, section 2(22), item (C)
The figures must have been published before the tax year began. Today that still means the 2011 Census. Census 2027 is under way, with Phase I commencing in April 2026 on State and Union Territory-specific schedules and population enumeration scheduled for February 2027 in the general case, but a count that has not been published cannot be used.
So a municipality recorded just under a lakh in 2011 carries the two kilometre band now, whatever the town looks like today, and land three kilometres out stays clear of the charge. Sellers treat the census figure as an in or out threshold. It also fixes which band applies, which is the part that decides more files.
Straight line, not road
Aerial means as the crow flies, ignoring the roads anyone would actually drive. Road distance is almost always longer, so a seller who measures by road believes the land sits further out than the law treats it. Nine kilometres by road is regularly five in a straight line, and five is inside the six kilometre band.
A seller checks the route on his phone. Nine kilometres to the corporation limits, comfortably outside the six kilometre band, so he treats the sale as tax free and says nothing in his return.
The officer measures the same stretch in a straight line and gets five kilometres. The road curves around a reservoir. The seller was not being careless about the law, he was measuring the only distance that had ever mattered to him. It cost him the whole position.
Straight line measurement applies only from assessment year 2014-15. For earlier years still under enquiry or in appeal, the shortest road distance governs. CBDT Circular No. 17/2015 dated 6 October 2015 accepted that position and directed that no further departmental appeals be filed on the point and that pending ones be withdrawn. Officers still raise it. The circular binds them.
Which law applies to your sale
Go by the date of the sale, not by the year you are filing in. Sales made up to 31 March 2026 are governed by the Income-tax Act, 1961, whenever they come to be assessed. Sales made on or after 1 April 2026 are governed by the Income-tax Act, 2025.
A sale in January 2026 is therefore still an old Act sale, even though the return goes in months after the new Act commenced. The section number moved. The test and the distance bands did not.
Why this reaches you even if you say nothing
The registrar or sub-registrar reports property transactions to the department. From 1 April 2026 the reporting threshold is ₹45 lakh, and it bites either on the amount or on the stamp duty value, so a sale priced below the guideline value can still be reported on the valuation. Gifts and joint development agreements are reportable on the same footing, which surprises families who thought a gift deed sat outside all of this.
The entry then appears in your Annual Information Statement whether or not anyone reports the sale in the return. Nothing is offered, because the seller was told the land was agricultural and saw no reason to mention it. So the entry sits there unexplained, sometimes for two years, until a query arrives asking why a large receipt was never accounted for. By then the certificate has not been obtained, the limits have moved, and what would have been a filing note has become a proceeding.
The lesson is not to hide the transaction better. It is that a sale which is genuinely outside the charge still deserves a complete supporting file, and where the applicable return form permits or requires an appropriate disclosure, the transaction should be properly explained there.
Five places where a general answer runs out
Everything above can be written in an article. What follows cannot. Each of these turns on documents nobody has seen yet, which is why a general answer stops being useful exactly at the point it starts to matter.
Where it stops being simple
Document questions| What you are asking yourself | What the answer actually turns on |
|---|---|
| "My village was brought into the corporation. Was that before my sale, or after?" | The date the inclusion was published in the gazette, set against the date of the deed. Announcements of intention, newspaper notices and objection stages do not move the line. Only publication does, and those dates can sit years apart. |
| "The corporation absorbed my village, but I had agreed the sale and handed over possession well before that." | Status is tested on the date of transfer, and that date is not always the date on the registered deed. Where an agreement, possession and registration occurred on different dates, the date of transfer requires separate examination under the statutory definition of transfer and the governing case law. Delivery of possession alone should not be treated as conclusive. |
| "The Tahsildar's certificate says nine kilometres. The officer's map says five." | Nothing in the Act says which prevails. It comes down to whose measurement is better documented, taken from which boundary, and as on which date. This one is won or lost on the file rather than on the law. |
| "The nearest body is a town panchayat, but it is graded as a municipality." | The name alone does not answer it. A body called a town panchayat may qualify, depending on how it was constituted under State law. Check the notification that created it, not the name on the board outside. |
| "I stopped cultivating three years before I sold." | The Act nowhere defines agricultural land, so its character is decided on the record in each case. Revenue entries, crop records and what the land was actually doing all matter. Passing the location test will not rescue a file that is weak here. |
What to have in hand before you ask anyone
Every one of these can be collected in an afternoon while the sale is still being negotiated. Every one of them is harder to get two years later, when the query has arrived, the town has been reclassified and the census page you meant to print has moved.
- The gazette notification for the municipality and its limits, taking the date of publication
- The published 2011 Census figure for that body, printed with the date you retrieved it
- A certificate or other reliable official evidence establishing the aerial distance from the relevant municipal limits as they stood on the date of transfer, supported where appropriate by authenticated satellite or survey material
- Revenue records showing the classification of the land
- Evidence that cultivation continued up to the sale
- The registered deed, and the entry as it appears in your Annual Information Statement
The rule is the easy part, and all of it is above. The five questions are what decide real files, and each of them is settled by documents rather than by principle.
Where a sale is in contemplation and the position looks close on any of them, the papers are worth working through before the deed is drawn rather than after the query arrives. If the land does turn out to be a capital asset, reliefs can be available where the money goes back into agricultural land, and those carry their own conditions and time limits that are best considered before the sale rather than after it.
Flashcards on the location test
Tap a card to turn itTest the position
Questions we are asked
I have farmed this land for thirty years. Does that make the sale tax free?
Not by itself. Long cultivation supports the character of the land as agricultural, which does matter. But whether the sale is taxable is decided by where the land sits in relation to the nearest municipality or cantonment board, and by that body's population. The two questions are constantly confused, and answering the first one confidently tells you nothing about the second.
Our village is small and has its own municipality. Does that make the sale taxable?
Only if that municipality has a population of ten thousand or more. Below that figure, land inside its limits is not a capital asset, and land outside its limits is not caught by any distance either. A small municipality is not the same thing as a taxable location, and this is the point most often got backwards.
Which law applies to a sale I made last year?
Go by the date of the sale. The Income-tax Act, 1961 governs sales made up to 31 March 2026, whenever they are assessed. The Income-tax Act, 2025 governs sales made on or after 1 April 2026. So a sale in January 2026 is still under the old Act even though the return for it is filed well after the new one commenced. The tests and the distance bands are the same under both.
Is the distance measured by road or in a straight line?
In a straight line, for assessment year 2014-15 onwards. For earlier years still open, the shortest road distance governs. CBDT Circular No. 17/2015 dated 6 October 2015 accepted this and directed that no further departmental appeals be filed on the point and that pending ones be withdrawn. Officers do still raise it, and the circular binds them.
Which census figure do we use, now that a new census is being taken?
The last census whose figures were published before the tax year began. That is still the 2011 Census. Census 2027 is under way, with Phase I commencing in April 2026 on State and Union Territory-specific schedules and population enumeration scheduled for February 2027 in the general case, but figures that have not been published cannot be used. A town that has grown well past a threshold since 2011 still carries its 2011 figure, and will until the new figures are published and a tax year begins after that.
Will the department even know about the sale?
Yes. The registrar or sub-registrar reports property transactions to the department, and from 1 April 2026 the reporting threshold is ₹45 lakh, measured either by the amount or by the stamp duty value, so a sale priced below the guideline value can still be caught. Gifts and joint development agreements are reportable too. The reported transaction can then be reflected in your Annual Information Statement whether or not you mention it in your return.
If one of the five questions is your question, it is worth asking with the papers in front of you rather than in the abstract. Write to TaxSmriti and we will tell you which document decides it.
Sources relied on
- Income-tax Act, 2025, section 2(22), definition of capital asset, in particular item (A) on land inside municipal limits with a population of not less than ten thousand, item (B) with the Table of distance bands, and item (C) defining population by reference to the last preceding published census, incometaxindia.gov.in, section 2
- Income-tax Act, 1961, section 2(14)(iii), which governs sales made up to 31 March 2026 and carries the same tests and bands, incometaxindia.gov.in, Income-tax Act 1961
- CBDT Circular No. 17/2015, F.No.279/Misc./140/2015-ITJ, dated 6 October 2015, on measurement of distance for the period prior to assessment year 2014-15, issued following the order of the Nagpur Bench of the Bombay High Court dated 30 March 2015 in CIT v. Smt. Maltibai R. Kadu, indiacode.nic.in, Circular No. 17/2015
- Income-tax Rules, 2026, Rule 237, statement of financial transaction, Table at serial number 9, purchase, sale, gift or joint development agreement of immovable property of ₹45 lakh or more or of that stamp duty value, reported by the Inspector-General, Registrar or Sub-Registrar, incometaxindia.gov.in, Rule 237
- Registrar General and Census Commissioner of India, Census 2027, house listing from April 2026 and population enumeration in February 2027 with reference date 1 March 2027, the 2011 Census remaining the last published, pib.gov.in, Census 2027
This note sets out the general position in law as at 13 August 2026 and is written for information only. It is not advice on any particular matter and should not be acted on without professional advice on the specific facts. The illustrations use invented facts and figures to show how the rules work and are not drawn from any client file. Provisions, thresholds and census figures change, and the position for your own land may differ.
