Whether Capital Gains on Agricultural Land Are Exempt

A landowner sold a field in village Sarana, in Chhindwara district. He had the revenue records, and his position was simple: the village had a population of about three thousand, and the land lay more than eight kilometres from the nearest municipality. Agricultural land is not a capital asset, so there was no capital gains tax to pay. The stamp duty value of the property was Rs 78,00,000.

The Assessing Officer wrote to the Tehsildar. The reply put the land at roughly two kilometres from the local limits of Chhindwara, and gave the population of Chhindwara, as per the 2011 census, as 20,90,922.

Neither figure was wrong. The owner had measured his village; the department had measured the town. That disagreement, whose population and measured from whose boundary, is what this note is about, and it is recorded in the Delhi Bench's order in Alka Sharma, decided 22 April 2019.

Set against it a case from the other end of the scale. In Mahendra L. Shah (HUF), decided by the Mumbai Bench on 30 May 2017, the assessee said his land lay beyond eight kilometres of the limits of Pardi municipality. The Talathi produced a map showing it within two kilometres, and the Assessing Officer then checked the census and recorded the population of Pardi municipality as 24,231.

Twenty-four thousand against twenty lakh. The Act treats them very differently.

The rule the two cases are arguing about

Agricultural land is not a capital asset, and gains on its sale are not charged. That exemption is withdrawn in two situations: where the land lies inside municipal or cantonment limits, and where it lies within a specified distance of them. The distance is not fixed. It rises with the population of the municipality.

So Pardi, at 24,231, reaches two kilometres. Chhindwara, at over twenty lakh, reaches eight. The same field at the same distance is exempt beside one and taxable beside the other.

The bands are set out in these terms in a number of orders, among them Smt. Shahnaj, decided at Jodhpur on 1 January 2025, which reproduces the provision, and Swaran Kaur, decided at Chandigarh on 8 January 2026. The Delhi Bench restated the whole rule in plain language in the Faridabad matter of Dharam Singh, decided 9 January 2026.

What it comes to around the cities

Chandigarh is where this is most often got wrong. The Union Territory had 10,55,450 people in 2011, which is over ten lakh and points to eight kilometres. The Municipal Corporation had 9,61,587, which is under it. The section looks at the municipality, not the territory, so the band is six. Two kilometres of difference, around Chandigarh, is a great deal of land.

Gurgaon is the other surprise. On the 2011 figure the corporation was under ten lakh, so its reach is six kilometres and not eight, whatever has been built since. The Act asks for the last preceding census whose figures were published. That is still 2011.

And the two dates are not the same. The population comes from the last published census. Whether the land was inside municipal limits, and how far from them, is judged as those limits stood on the date of transfer, and they have been redrawn repeatedly around Gurgaon, Faridabad and Mohali.

Three things that decide most of these disputes

The distance is aerial, not by road. In Phool Singh Raghav, decided by the Delhi Bench on 1 September 2026, the assessee produced a DGPS measurement by a survey firm putting the land 14.2 km from the municipal limit of Gurgaon, together with a Deputy Commissioner's notification showing Village Badha outside the municipal area, and a distance certificate from the Sub-Registrar and the Patwari. That is the shape of the evidence this question needs.

Population means the census, not an estimate. In Shiva Corporation (India) Limited, decided at Jaipur on 21 August 2025, the assessee produced population data for two villages taken from Google. The department's case was that the villages lay within four kilometres of the Municipal Corporation of Samalakha in Panipat district, which is the comparison the section actually calls for. The capital gain in issue was Rs 38,56,889.

Whose population, for land inside the limits. The 1961 Act speaks of land in an area "within the jurisdiction of a municipality ... and which has a population of not less than ten thousand", and never says what "which" attaches to. The Delhi Bench took the municipality in Sobhi Lal Saini, decided 13 January 2023, holding that as the land was situated in the municipality and its population exceeded ten thousand, it was not agricultural land. The contrary reading is argued constantly. One order often pointed to, Kaushalkumar Gangaram Patel, decided at Ahmedabad on 14 October 2019, does not decide it. The area-wise passage in it is the assessee's own submission reproduced in the narrative, and the appeal was allowed for statistical purposes because the first appellate authority had passed no reasoned order.

What the Income-tax Act, 2025 settled, and what it did not

Section 2(22) sets the distance bands out in a table and heads the population column "Population of municipality or cantonment board". For land outside municipal limits, the referent is named and the argument is over.

The limb covering land inside municipal limits is reproduced word for word. The same sentence, the same "which", the same two readings.

That is the more common case, not the rarer one. It is the field that was outside a small town in 1990 and sits inside a corporation today, because the corporation extended its limits and absorbed the village.

In Delhi this matters more than anywhere. On the reading taken in Sobhi Lal Saini, every agricultural holding inside the Municipal Corporation of Delhi is a capital asset whatever its own village population, because the corporation is far above ten thousand. But it does not follow that all agricultural land in Delhi is caught. In Kaushal Infraproject Industries India Ltd, decided 30 December 2019, the Tehsildar of Narela-Alipur certified lands 9 km from the local limits of the Municipal Corporation of Delhi, and on that footing they were agricultural lands outside section 2(14). Two cautions attach to that order. It rests on the CBDT notification of 06.01.1994 under the earlier regime, and it records that the notification names the Municipal Corporation of Delhi and not the North Delhi Municipal Corporation, "which is later on created" - a live point for any sale between the trifurcation and the re-unification.

Six documents, collected before any dispute

1. The revenue record showing classification and land revenue paid.
2. Proof of actual cultivation in the years before sale.
3. A certificate of municipal or cantonment limits, stating whether the land fell inside, and of which body, on the date of transfer.
4. A certified aerial distance from those limits, by DGPS or survey report.
5. The census figure for that body, for the census preceding the sale.
6. Any permission for non-agricultural use, or its absence, in writing.

Collect them at the time of sale. By the time a notice arrives, whether a field was cultivated five years earlier has to be proved from whatever happens to have survived.

One caution about older decisions

The second limb has not always read as it does now. In CIT v. Madhu Kumar N. (HUF), ITA No. 3926 of 2009 decided on 29 March 2012, the Karnataka High Court was construing a provision under which the area had to have been notified by the Central Government, not one turning on population bands. Decisions from that era answer a different question. Check the date before leaning on any of them.

And all of this assumes the land is agricultural in the first place, which is a question of its own, taken up in the companion note on farmhouses.

This note is general information drawn from the statutory texts and reported decisions and is not advice upon any particular matter. Whether a given holding is agricultural land depends on its own facts and record. Population figures for the cities are from the Census of India 2011.