CHENNAI: Farmland is not an automatic association with real-estate investment though it can offer rich pickings.
Farmland investment offers three key benefits — income generation, land price appreciation, and diversification due to its low correlation with other assets. Food prices typically keep pace with inflation, and hence, the income from a farm may provide a good inflation hedge. The bonus is that farming income is exempt from income tax and capital gains also qualify for tax exemption if the land is outside (typically 8 km limit) the boundaries of a civic body such as municipality.
Another key advantage is the low financial entry barrier. Typically, farmland is cheaper than a comparable piece of urban property.
Lay of the land
Farmland buyers from the city usually lease out the parcel to a local farmer or a farm manager for a fixed payment or a share in the profit. Investors may also pool funds to invest so they can take up initiatives such as organic farming or share the monitoring responsibility.
Some may buy purely for capital appreciation. Factors such as road access, infrastructure improvements and economic development determine price appreciation. Expanding cities and towns fetch investment-buyers a bumper harvest as in the case of many who bought land on the outskirts of Chennai and made over 16 times their investments as the city grew and their holdings became invaluable.
Many prefer constructed structures and zero-in on farmhouses built on farmland. These are usually close to cities and may be part of a gated community. The lower Floor Space Index (FSI) for farm land (0.02) limits the size of construction, yet pay-offs include favourable property tax and a weekend getaway.
That said, the dream of buying land at low cost to eventually convert the property into a residential plot and sell it for a huge gain could turn into a nightmare too, if the title-deeds to the land you bought are not proper. Take the case of Bollywood actor Rani Mukherjee. She bought a plot in Shirdi, but it was seized by the government as it was actually a piece of leased out government land. It is now at the centre of a prolonging legal battle.
The reality is that farmland purchases are risky, so if you are keen on it, do your homework well.
Dig before you sow
First, determine whether you are eligible to buy agricultural land. Non-resident Indians, Persons of Indian Origin and overseas citizens of India cannot purchase agricultural land, plantation property or farm houses, says Aarthi Lakshminarayan, an advocate with Dua Associates.
Also, the laws are not uniform across the country, agriculture being a State subject. In Himachal Pradesh, for example, only an agriculturist from the State can buy farmland. Karnataka and Gujarat also restrict ownership of agriculture land to State-based agriculturists. But in Maharashtra, you can buy agricultural plot if you have farmland elsewhere in the country, says Shyam Sundar, a Chennai-based advocate.
There are also ceilings on how much land you can own. In Kerala, there is a strict ceiling on land ownership across categories of holdings.
In Uttar Pradesh, on the other hand, there is only a limit of 12.5 acres in the case of agricultural land holdings. Local panchayats may place restrictions on sale; there are also such issues as title verification, encroachment hazard, dynamics of local politics, and land sharing norms.
Test the soil
Purchasing a farmland means ploughing through a plethora of legal documents and due diligence. For instance, the land you want to buy may have been only leased to the seller, and hence, not saleable.
Also, land granted by the government under some provision may require permissions for sale. For example, land given to freedom-fighters or ex-servicemen can only be transferred with the District Collector’s permission.
If you are buying a land owned by a minor, permission of a court is needed before the transfer can be put through. Any transfer by a guardian without court permission can be challenged by the minor within three years of him/her attaining majority, cautions Aarthi.
There could be practical issues related to the land, such as a blocked approach and access share. For instance, you may have to go through a portion of a neighbour’s land to reach your property which means there can be disputes over access. You must also check other rights to share and use, known as easements. These include sharing arrangements for water, allocation to run power line or sewers.
If you bought a piece of land hoping to have it re-zoned, be sure if it is ‘wet’ or ‘dry’ land. Wet land is cultivable land with irrigation sources, and conversion of arable wet land is very difficult. Many States allow conversion of only dry land for non-agricultural purposes. Typically, the District Collector is the authority to reclassify land.
But the rules for conversion vary from State to State and may involve delays. For instance, in Tamil Nadu, dry land can be converted for non-agricultural use, if no farming activity has happened on it for the last 10 years.
So, if you hope to benefit from the reclassification of your land purchase, first check how feasible it is.
Farmland is an illiquid asset and you may not be able to exit the investment quickly. Unlike stocks or urban property, agriculture land is a means of livelihood for farmers, and cultural factors play a role in the sale dynamics. Investors may unknowingly offend local sensitivities. Land also carries the risk of being acquired by the government for industrial or infrastructure development.
As with any investment, buyers need to take a call after understanding the dynamics of the asset, and take care to sift the grain from the chaff.