The pros and cons of buying agricultural land


A number of urban investors are investing in agricultural land, owing to the slump in urban realty and the promise of greater long-term returns. We examine the benefits and risks, for those who wish to buy agricultural land.

With growing purchasing power, investors in India are now searching for innovative ideas to earn returns from their investments. One such way is investing in agricultural land. While some investors keep such land as an asset, there is a section of investors who leverage the growing market of organic fruits and vegetables, to supplement their income. A number of experts have agreed that farm investment is a safe option for parking one’s funds as the return on investment is usually higher than other investments and also lends safety to investors’ money. Also termed as agro-realty, the market for such investors is growing, especially after the COVID-19 pandemic.

 

Urban investors are now looking at the returns potential of agricultural land in the suburban or peripheral areas of big cities and state capitals.

“While the land is inexpensive, in comparison to an urban land, investors expect some healthy returns in terms of resale value

There is an increasing demand for such land parcels, owing to the scarcity and high price of land in cities, with urban investors buying it to earn profits on resale or use it for cultivation.

Ravi Gaurav, member of MCHI, explains that “Many investors feel that buying agricultural land in neighbouring districts of tier-1 and tier-2 cities and rural areas, is the best investment alternative in the prevalent market conditions. Although agricultural land has always been considered as one of the best long-term investment options, it has become sought after now, due to the slump in urban realty markets.”

See also: How to do due diligence for land purchase

For example, a plot of 120 sq yards in Lucknow’s city area, costs Rs 8-18 lakhs. In comparison, agricultural land can be bought for Rs 1-8 lakhs, per acre, depending on the location and proximity to the city. The scenario is similar in most metro cities.

However, buying agricultural land can be tricky.

 

Also read all about pros and cons of investment in land

ROI on agricultural land

Returns on investment on land purchases are higher in emerging and developing areas, where there is a possibility of upcoming infrastructure projects. Rates of land along the Jewar airport site have, for example, started to move upwards after the UP government announced that it would build the national capital region’s second airport in Noida.

Pradeep Mishra, a Delhi-based real estate consultant, points out that it is good, if the land is located in an area, where some government scheme is to be launched, or if it is included in the master plan of the region. Chances are that such a piece of land will fetch a higher value in future, he says.

See also: How tax is imposed on your agricultural income?

Advantages of investing in agricultural land

An agricultural land plot can guarantee long-term returns, if it is in an area where the government has planned some infrastructure project in the near future.

Moreover, the compensation, in the case of acquisition by the government, is higher for rural land than that for an urban land. A number of state governments are also planning a land pooling policy, for areas where city is expanding. If you become an owner under the land pooling policy, you will get a guaranteed regular returns from the pool.

See also:  Commonly used land and revenue record terms in India

As is true of all land-related developments, your asset does not depreciate with time – something that cannot be said about property such as flats, apartments, etc. With time, the quality of the building structure deteriorates and the owner has to spend substantial amounts of money, to maintain it. Investing in agricultural land, not only saves you from spending all that money  but also leaves you with an option to use the land for varying purposes in future, within the boundaries of the law.

 

Disadvantages of buying agricultural land

Not everyone can buy: As per the law, you need to be a farmer to own agricultural land in India. While most states have such a ruling, some have eased this prerequisite. You may also get receive such a land, through a gift or through inheritance.

See also: Can an NRI purchase or own a property in India?

Conversion is not easy: You cannot convert a fertile piece of agricultural land into a residential one. The land should be a dry land, for conversion.

Land Ceiling Act: A number of states restrict the ownership of land. Therefore, check how much can be bought in that state.

Not everyone can buy: NRIs, for instance, cannot buy agricultural land in India.

Knowledge of local land laws and terminology are a must: Buying agricultural land could be extremely difficult, if the buyer is not well aware of the land laws and the local terminologies used in the course of the transaction. Since land is a state subject, laws are different in each state and not having a thorough knowledge, will be disadvantageous, considering the legalities involved in the process.

The knowledge of local land measurement units, for example, is a must to have a clear understanding and extent of the land parcel you are buying. The knowledge of conversion of these units to globally accepted measurement units, would also give you an idea about the per sq ft rate you will be paying for the same.

If the locally used land measurement unit is, say, gaj, the buyer should be aware of the gaj to sq ft/sq metre conversion. This would enable him to gauge the per sq ft price of the land.

See also: Local land measurement units in India

Pros of buying agricultural land Cons of buying agricultural land
Guaranteed long term returns Buyer should be a farmer by possession
Government compensation is higher if gets acquired Land conversion is complicated
Can participate in land pooling policy Few states restrict ownership of farmland

 

Risks in buying plots, land parcels

Even though the benefits of buying a land parcel or plot are innumerable, especially if it is an agricultural land, there are certain risks involved in such purchases, as well. This is particularly true in case the buyer is not extremely careful about property’s documents. While states have made it easier for investors to find all land-related information online, a great deal of diligence has to be employed, to ensure that all the documents are in place and there is no forgery.

 

Check applicable laws

Evaluate other applicable laws pertaining to the transfer of the rights to the land, ownership records of the land and leases, if any. Often, such plots of agricultural land may not be transferrable. The land may also be a leased one. In such cases, make sure that the tenants do not have any rights over the land and only enter into the transaction, after all such issues are cleared.

See also: Legal tips for buying agricultural land in India

 

Documents required for buying agricultural land

Here is a list of document that you need, to buy agricultural land. This may vary as per the state:

 

Trends in agro-realty

Investors in this segment, are either buying dry converted rural land, or are buying land through resale. While the value is still lower than land plots in the city area, these investors become owners of land in a rural area. This way, they become eligible for buying more actual agricultural land. Some people also buy a small piece of residential property in a village and use this residential address, to buy an agricultural land within the same village.

Prices of agricultural land are expected to increase, especially around urban areas, owing to the growing demand for affordable housing, which is only feasible along the outskirts of metro cities. Land in such areas is also in demand, for public and private projects, adds Gaurav. Nevertheless, you will need to spend a substantial amount to buy the land and hence, you should cover all the risks, before you enter the deal.

 

Agro realty investments – A situation after COVID 19

There are several reasons and opportunities for the agro realty sector to boom in India. Since most companies use extensive chemicals on food products, especially perishable ones, people are trying to shift to consuming organic products that have less artificial chemicals. This is because such chemicals often cause health and environmental impacts. Such concerns have risen rapidly amidst the pandemic and people have shifted to consuming healthier food items. Thus, this holds a lot of opportunity for organic farming, thereby increasing the investments in agricultural land. It is also expected that the market share of organic food and beverages would reach USD 327,600 in 2022 and individuals even with moderate personal disposable income would shift to consuming organic items and lead a more sustainable life. Thus, investing in agricultural lands have recently grown beyond expectations in India along with increasing opportunities for organic farming.

 

Benefits of investing in the agro-realty sector

The following are the benefits of investing in the agro realty sector-

  1. The final price of the land is lower as the cost of developing it is shared amongst the owners. Thus, an investor has to pay a lower sum for such plots.
  2. The returns on investment are higher than investing in stocks and shares especially due to the boost in organic farming and the shift in customer tastes and preferences. The efforts and the total costs incurred by investors are lower than any other investment but also has greater returns in comparison.
  3. Unlike flats or houses, there are two primary benefits of investing in agricultural lands, Firstly, one is able to avoid the costs incurred in its maintenance and secondly, agricultural lands do not depreciate. Thus, investors need not worry about the price of the plot decreasing over time.

 

Agricultural land for real estate development

Investors who are considering buying an agricultural property in rural areas around the city, may find this opportunity very lucrative as, now, a number of state governments are opening up farm lands for housing development and industrial purposes. Recently, the state government of Gujarat announced that real estate developers will be allowed to purchase agricultural land for affordable housing under the Gujarat Tenancy Act. Similarly, in Karnataka, the state government passed amendments to the land reforms act that liberalised farmland ownership and extends the facility to buy agricultural land by a non-agriculturist. This could just be a start and very soon, other states may open up farm lands for real estate construction, resulting in more supply and maybe, cheaper homes.

All about the Land Acquisition Act

 

Is it worth buying agricultural land in India?

Investing in agricultural land is capital-intensive. Therefore, investors should have a clear financial plan in mind, before investing in agricultural land. Also, it is imperative that investors keep realistic expectations from their investment, as the returns from farmland is not as attractive as believed. Usually, agricultural land is considered a good investment for high net-worth individuals and for those with surplus income. For salaried or self-employed individuals, living in cities, going through all this process will be time-consuming and tiresome.

 

Mistakes to avoid while buying agricultural land

  • It is crucial to ensure that one takes into account the importance of land titles. Check the title of the farmland, before purchasing it. This is beneficial in two ways – first, it helps in avoiding legal complications and second, it helps in acquiring the land faster.
  • Buyers should be aware of the farmland laws, especially if they belong to another state. Agricultural farmlands come under the jurisdiction of the state and therefore, rules can vary across different states. It is essential to check the existing laws before purchasing the agricultural land.
  • Buyers should also ensure that they physically verify the property and look into its details. This is important for agricultural land, as the buyer needs to know the quality of soil and other such features.

 

Documents required for land due diligence

The following documents are required for this purpose:

  • Khata certificates
  • Grant certificates
  • Encumbrance certificate
  • Conveyance certificate
  • Patta book
  • Mutation documents

How to make your land a profitable investment?

You can employ the following methods, to turn your land investment into a profitable venture:

  1. Depending upon the location, you can rent it out for community gardening.
  2. Start blogging about your newest farming adventures.
  3. Set up a beehive farm and convert it into a tourist activity.
  4. If the land is fertile, grow unique flowers to sell at the local market.
  5. Sell plant seeds online.
  6. Offer your services for pet sitting/creche.
  7. Grow herbs and sell it online.
  8. Offer tours or classes on farming.
  9. Use the land to generate solar energy.

 

Impact of COVID-19 on land rates

Even though property appreciation has remained highly affected, because of the Coronavirus pandemic that broke out towards the end of 2019, its impact on land values has been limited. This is because of the scarcity of land in developed areas and also because this asset does not undergo any depreciation.

 

Can you build a farmhouse on agricultural land?

Legally you cannot build a house on agricultural land. However, the rules may vary from state to state. For example, under the Karnataka Land Revenue Act, farmhouses can be built on agricultural land, of size not more than 10% of the landholding. Also, the farmhouse should be for self-use only or can be used for residential purpose of family members, dependents or servants. Farmers can use it for purpose of agricultural operations, tethering cattle or storing agricultural products.

 

Method For Conversion of Agricultural Land To Non-Agricultural Land

No residential or commercial and development can be carried out on agricultural land in India unless there is a proper ‘change of land use’ done. The change of land use can be obtained by filling up an application form and sending it to the Commissioner of the Land Revenue Department and all the reasons for the conversion have to be mentioned in that.

The following documents will be mandatory to be sent with the application form for the conversion:

  1. The Original Sale Deed or gift deed or partition deed
  2. The Mutation Letter
  3. Certified survey Map
  4. Latest tax paid receipt
  5. ID Proof

In the event of conversion of agricultural land to non-agricultural land, a fee has to be paid. The fees depend on the type of property and its location. The details like the size of land plot, existing mortgages, type of crops and soil on the land, ownership details of the previous and present owners need to be specified. The certified copies of these documents can be obtained from the Tahasildar office or the Revenue Office. Unpaid dues should be paid then and there and copies of the payment proof need to be attached.

 

FAQs

Is sale of rural agricultural land taxable?

Agricultural land in rural areas is not considered a capital asset. This is the reason any gains from its sale are not taxable under the head Capital Gains.

How much construction is allowed on agricultural land?

Agricultural land cannot be used for constructing property. You need to get the land use converted from agricultural to residential before any construction.

How to convert agricultural land to non-agricultural land?

Land is a state subject and according to law, fertile land cannot be converted to be used for residential purposes. Only dry or barren land parcels could be converted.

(With inputs from Surbhi Gupta)

 

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