Want to invest in agricultural land? Here’s what you ought to know

As an investment avenue, agricultural land offers good returns, particularly if it is located near upcoming government infrastructure projects such as highways and airports. But there are state laws to contend with, and the definition of agricultural land varies. “For instance, in Maharashtra, agricultural land is classified as land used for cultivation or sites used by agriculturists for dwelling houses. Besides cultivation of crops, agricultural activities in such land include horticulture, garden produce, grazing cattle, etc,” added Harsh Parikh, partner at Khaitan & Co. Government documents also specify the category of land—whether it is agricultural or otherwise.

Additionally, according to tax rules, capital gains from the sale of agricultural land in rural areas are exempt from taxes. That located in urban areas are taxed.

If you are one of those interested in buying agricultural land, it is crucial to understand the significant risks associated with buying land. As per a government release, almost 66% of civil suits in India are related to land or property disputes, with an average dispute pendency of 20 years, according to one study.

The primary risk, especially in the case of agricultural land, lies in ensuring a clear title deed (more about that later). There is need for a thorough due diligence as well.

Mint interviewed a few people about their experiences with buying agricultural land. Industry experts also weighed in on the factors to consider before such an investment.

What to look out for?

Shital Jain, a resident of Itarsi in Madhya Pradesh, is optimistic about investments in agricultural land, citing its higher potential for appreciation in value. The 34-year-old, who holds an MBA finance degree from Symbiosis International University and has worked five years as a research analyst tracking equity and commodities in Mumbai, invested in four acres of agricultural land three years ago. Jain says the price of his land has since doubled. He has now leased it to a few farmers and this yields around 4-5% of the investment value per annum.

Jain, who joined his father’s commodity trading business a few years ago, is very satisfied with his investment, unlike his residential property in Mumbai, prices of which have remained stagnant for a long time now. On top of that, the maintenance costs are higher.

Jain emphasizes the importance of “arability, proper road connectivity, irrigation facilities, and access to communication” before investing in farm land. In terms of managing it, he highlights the necessity of fencing along its boundaries, and ensuring access to water through tube wells. Note that Jain’s involvement in the agricultural business made it relatively easier for him to find suitable land and farmers for leasing.

Ayush Gaur, a BSc agriculture graduate from Udaipur, Rajasthan, had a different experience on both occasions that he purchased land for his dairy business. Over the past 3-4 years, Gaur acquired two plots of land. He bought the first plot in a remote village near Udaipur, but faced multiple challenges in setting up a dairy farm there. Also,the value of the land has not appreciated much over the years. He bought the second plot of land after six months of research. This plot, just about 20 km from Udaipur, ticked all the right boxes and its price has also risen.

“I realized the importance of location this time, and took the help of a local broker to find a suitable plot of land. Road connectivity, especially in the rainy season, is very essential for my business.” He also got the quality of soil tested to check if it meets his requirements.

Vinit Matlani, a realtor based on the outskirts of Mumbai, has been in possession of agricultural land for more than 10 years now.

“Agricultural land is a lucrative investment option, but an investor must be aware of where and how to buy it, and the process to obtain a clear title deed without any encumbrances,” Matlani, the owner of Rudram Realty, said.

Matlani believes that the title deed (the legal right to own land or property), is key to a good acquisition. “You have to check the mutation entries (government records that show the change in ownership of the property in the past), get old documents to verify how the transactions happened over a period of 30 or 40 years, and obtain details about the families that owned the land. All these need to be known before buying the land,” he added.

The risks involved

There is no concrete data on actual returns from agricultural land. Also, most property owners who talked to Mint emphasized the importance of a clear title in land acquisition.

“As a buyer, you may not know if the person you are buying the land from is solely entitled to the right on that property (as per succession laws) or if there are any claimants. You have to rely on the revenue records but that itself may not be a foolproof document,” said Parikh

Challenges also arise if the property has been partitioned by a joint family. In such cases, “ideally, there should be a relinquishment deed from those not entitled to such property. In the absence of such a document, we’ll never know if there is any aggrieved party who can go for litigation in the future,” said Parikh.

It is advisable to ask for a probate document from the seller. However, in most cases, that will not be available. Further, in cases where the landlord and the farmer tilling the land are different, it needs to be ensured that the latter does not have any occupancy tenant rights on the property (right to cultivate on the land for livelihood despite not owning the land), said Parikh.

The other major concern in the real estate market is the use of cash transactions that are unaccounted for. The stamp duty on purchase of land has to be paid as per the circle rate or actual value of the transaction, whichever is higher. “Earlier, there used to be a huge difference between the circle rate and the market rate, due to which registrations happened at the circle rate, while the balance used to be settled in cash. But the situation is improving as the circle rates in and around metro cities are now kept closer to the market value, lowering the use of illegitimate cash transactions in this space,” said Sunitha Rajesh, partner, IndusLaw.

Note that both buyers and sellers involved in unaccounted cash transactions are liable to be prosecuted under the PMLA (Prevention of Money Laundering Act) rules. This is in addition to the investigations and penalties one would face under the Income Tax Act, added Parikh.

Regulations

There are certain regulations one must keep in mind when buying agricultural land. An NRI (non-resident Indian) cannot buy agricultural land in India without the consent of the Reserve Bank of India. They can, however, inherit such property.

Further, since agriculture is governed by state laws, “almost all states have some sort of regulation or ceiling on the extent of agricultural land that one can buy or hold. Many states also discourage buying agricultural land merely for the purpose of investment by imposing conditions on either or both acquisition and holding of agricultural lands,” said Rajesh.

For example, in Maharashtra, only farmers can buy agricultural land without the consent of the district collector. For this purpose, agriculturists are defined as farmers who cultivate the land themselves. If either of the buyer’s parents or grandparents are agriculturists, then that person is also entitled to buy such land, said Parikh. “There is also a ceiling on the number of acres of agricultural land one can hold. In Maharashtra, it is 54 acres.”

Do note that there is no centralized government website that publishes land prices and how they have moved historically. Due to the lack of transparent data, it becomes difficult for buyers and sellers to ascertain the price. “However, one can check the land prices on each state sub-registrar’s online portal or data of certain private agencies,” added Parikh.

Updated: 04 Jul 2023, 12:47 AM IST