Based on data from China’s micro‐survey of farm households and the new round of farmland titling policy implemented nationwide by province，an empirical analysis was conducted using the difference‐in‐difference method to analyze how the farmland titling policy changed the factor allocation of farm households as well as income disparities within the village. The analysis found that the income relative deprivation index of households declined significantly after receiving farmland rights certificates，indicating that the farmland titling policy can reduce the income gap within villages. Heterogeneity analysis shows that the effect of the farmland titling policy was affected by the resource endowment of farmland and that the effect of the farmland rights certification policy was more obvious for farm households in plain areas and those with more serious land fragmentation. Mechanism analysis shows that the farmland titling policies mainly reduced the relative income gap by promoting the transfer of land and agricultural labor among low‐income farm households，and increasing land rental income and non‐farm employment income. Extended analysis shows that the reduction of the relative income deprivation index by agricultural land titling policies will be affected by the social security status of farm households and the level of development of regional factor markets. The conclusions indicat that institutional reforms that release the productive vitality of land and labor factors are a feasible path to promote the optimal allocation of factors of production in low‐income farm households and to narrow the internal income gap in rural areas.