The decisions will help villagers get their properties registered and carry out construction works after approval of building plans from authorities.
Earlier, under the Section 81 of the Land Reforms Act, no agricultural land could be used for construction of houses and other purposes.
Describing it as "historical decision", Dikshit said it will provide relief to lakhs of people in the city.
Lal Dora refers to land which is part of the village 'abadi' (habitation) which is used for non agricultural purpose only. Lal Dora was exempted from the building bye laws, and construction norms and related regulations under Delhi Municipal Act.
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Officials said the Union Urban Development Ministry will have to ratify the decision for its implementation.
Announcing the Cabinet decision at a rally in Talkatora stadium, Dikshit promised that all "problems" being faced by people living in rural areas will be resolved soon.
"We won't let rural Delhi lag behind the urban areas in development. We will provide same facilities in these areas that are available in urban areas. Our foes say that this decision is taken keeping in mind the upcoming elections, but if that would have been so, you wouldn't have elected us thrice," she said while addressing villagers.
"Villagers should be allowed to build their home on their land wherever they want. We have decided that Lal Dora will be extended to all 360 villages. We will give three months' time to RWAs or Gram Sabhas to identify the extended population of the village and apply accordingly," said Lovely.
The minister said that anybody who wants to build a house in rural area now can approach MCDs as the civic agencies have the authority to clear it.