Amid unprecedented challenges to protect arable land, China’s permanent capital farmland (PCF) has played a crucial role in grain production. However, a clear legal and physical boundary between PCF and arable land seems to be unable to stop the spread of non-grain production. To address it, an analysis framework for PCF non-grain production was developed to examine the state and drivers of village-scale PCF non-grain production based on the logical relationship between PCF and arable land in the rapid urbanization of Liyang. The results suggested that PCF comprised approximately 70% arable land and 30% adjustable land. Meanwhile, forest land and aquaculture ponds occupied over 25% of PCF, while nearly 20% of PCF is unsuitable for the resumption of crop cultivation. The transition state (scenario SR) offered a realistic representation of PCF non-grain production, with an average non-grain production of 48.88%. This is 14.00% lower than the current state (scenario SD) and 9.65% higher than the future state (scenario ST). Furthermore, PCF area and agricultural income per capita significantly encouraged PCF non-grain production, with explanatory powers of 51.60% and 42.40%, respectively. In contrast, urbanization rate (with an explanatory power of 35.30%) significantly discouraged it. Therefore, this paper proposed PCF redefinition, flexible PCF, and diversified economic incentives to mitigate PCF non-grain production at the village scale.