Property Tax

Property tax is the amount that is paid by the landowner to the municipal corporation or the local government for his/her area. The tax must be paid every year. Property, office buildings, and residential homes that are rented out to third parties are considered real estate assets.

Property tax is charged by the government on all tangible real estate that an individual owns. These real estate assets could include residential homes, office buildings and premises rented out to third parties. It also know as house tax.

What is Property Tax?

Taxes are the primary source of income for a government, with the taxes earned dictating the resources available to citizens. Every property is a taxable asset, and the property tax is an annual amount paid by a property/landowner to the government. This tax could be paid either to the local state government or Municipal Corporation, depending on government policies.

The word “property” in this context refers to all tangible real estate under the ownership of an individual and includes houses, office buildings and premises rented to third parties. Property tax, as a concept has been around for centuries and is acknowledged across the globe, with records of farmers and peasants paying tax on their properties even in the middle ages.

Types of Property

Property in India is classified into four categories, which help the government estimate tax based on certain criteria. The different property divisions in the country are mentioned below.

  • Land – in its most basic form, without any construction or improvement.
  • Improvements made to land - this includes immovable manmade creations like buildings and godowns.
  • Personal property – This includes movable man-made objects like cranes, cars or buses.
  • Intangible property

Present State of Property Tax

Property tax in India is to be paid on “real property”, which includes land and improvements on the land, with the government appraising the monetary value of each such property and assessing the tax in proportion to its value. The municipality of a particular area has to do this assessment and determine the property tax, which can be paid either on an annual or semi-annual basis. This tax amount is used to develop local amenities including road repairs, maintenance of parks and public schools, etc. Property tax varies from location to location and can be different in different cities and municipalities.

How to Pay Property Tax Online?

The internet has made a huge impact on how the world functions, opening new doors and simplifying lives. Paying property tax was considered a huge hassle in the past, but those days are long gone, thanks to the option of paying property tax online. Most municipal corporations provide the option of paying property tax online, streamlining the process and saving valuable time.

Steps to Pay Property Tax Online

  • Step - 1:Log in to the official website of their municipality/city corporation.
  • Step - 2: Choose the tab indicating property tax and navigate to the payment option.
  • Step - 3: Choose the right form (either 4 or 5), based on the category under which an individual’s property falls. These forms are used to determine if any changes have been made to a property in question.
  • Step - 4: Choose the assessment year. This is the year for which property tax needs to be calculated and paid. Most corporations provide an option to clear backlogs in property tax payment.
  • Step - 5: Individuals will then be required to fill in their property identification number and any other relevant document pertaining to their property (zone under which it falls, property type, etc.) including the owner’s name.
  • Step - 6: Once all relevant information has been entered, individuals can choose the mode of payment, which could be credit/debit cards or internet banking.
  • Step - 7: Once payment is made individuals can take a printout of the challan for their reference.

Note: These are the basic steps involved in paying property tax online and could vary depending on the city/town corporation.

Calculation of Property Tax

The formula used for calculating property tax is given below:

Property tax = base value × built-up area × Age factor × type of building × category of use × floor factor.

Property tax in India depends on the location of a property in question, with taxes varying from state to state. Different civic corporations use different methods to calculate tax, but the general overview of such calculations remains the same and is explained below.

An assessment of the property is first carried out by determining the area it is in, occupancy status (whether it is self-occupied or rented out), type of property (residential, commercial or land), amenities provided (car park, rainwater harvesting, store, etc.), year of construction, type of construction (multi-storied/ single floor/ pukka or kutcha structure, etc.), Floor space index and carpeted square area of the property.

Once these parameters are determined the civic agency can use a formula it deems fit to calculate tax. Different agencies use different formula.

The tax on a property will vary according to the factors mentioned above and can be easily computed online, through the official website of the municipal corporation concerned.

Different Methods of Calculating Property Tax

In general, the municipal authorities use one of the following 3 methods for the purpose of calculation of property tax:

  1. Capital Value System (CVS): Under the Capital Value System (CVS), the property tax is calculated as a percentage of the market value of the property. The market value of the property is decided by the government on the basis of the locality of the property. This valuation system is followed in the city of Mumbai.
  2. Unit Area Value System (UAS): The tax valuation as per the Unit Area Value System or UAS is calculated on the basis of the per unit price of the built-up area of the property. This price is decided on the basis of the expected returns of the property as per its location, usage, and land price. This value is further multiplied with the built-up area of the property to derive the tax valuation. A number of municipal authorities such as Patna, Bengaluru, Delhi, Hyderabad, and Kolkata follow this method.
  3. Annual Rental Value System or Ratable Value System (RVS): As per the RVS or the Annual Rental Value System, the tax is calculated on the rental value which is derived from the property in a year. This need not be the actual rent amount which is collected from the property. However, it is the valuation of the rent which is determined by the municipal authority and is derived on the basis of the location, size, and condition of the property. The proximity of the property to landmarks and other relevant amenities is also taken under consideration at the time of valuation. Chennai and parts of Hyderabad follow this method of tax calculation.

Interest on Property Tax

Late payments towards property tax can attract a fine, generally equivalent to a certain percentage of the amount due. This interest varies from state to state, with some states choosing to waive off such interest and others charging rates from 5% to 20%, depending on their individual policies.

For Example:

Some states waived off penalties on property tax while Bangalore decided to slash interest for late payments from 20% to 10%, in a bid to get more people to pay their dues.

Computation of Income from House Property

Understanding income from house property can be tricky. To make it simple, here are a few things to keep in mind:

  • Only the Net Annual Value of your house(s) is considered for taxation. Net Annual Value is arrived at when you deduct the municipal taxes paid on the property from the gross annual value of the house. For example, if you are receiving Rs.1.2 lakh as rent annually on a house you have let out, and you are paying Rs.40,000 as municipal taxes, then the Net Annual Value of your house is Rs.80,000, and you have to pay tax only on this amount.
  • If your house(s) is lying vacant for any period during the financial year due to lack of tenants, you have to consider only the income received as rent and not compute it against the whole 12 months. For example, if a house yielding Rs.17,000 as rent is vacant for 4 months of the fiscal year, then the gross value of the house will be Rs.1,36,000 (Rs.17,000 * 8). Tax payable on this income will be calculated after deducting the municipal tax amount paid and the standard deduction of 30%.
  • If your house(s) is lying vacant and not giving you any income, but you are paying municipal taxes, you can offset this loss against income from other sources – such as your salary or rent from any other property – during the same fiscal. If you are unable to offset the loss in the same year, you can carry forward this loss for up to 8 years.

Tax Deductions against Income from Property

Section 24 is titled as “Deductions from income from house property”. ‘Income from house property’ is applicable in the following cases:

  • If you are renting out your house(s), then the rent received will be considered as part of your income
  • If you have more than 1 house, then the Net Annual Value of the houses, except the house you are living in, will be considered as your income.
  • If you own only 1 house and you are living in it, the income from house property will be considered as NIL. Any income derived from rent and annual value of additional houses, will be subject to tax after deductions made under Section 24.

Deductions under Section 24

There are 2 types of deductions under Section 24 of the Income Tax Act:

  • Standard deduction: This is an exemption allowed to every taxpayer, where a sum equal to 30% of the net annual value does not come under the tax limit. This is not applicable if you are occupying the only house you own.
  • Interest on loan: If you have taken a home loan for purchase, construction or renovation of the house, whatever interest you pay on the principal amount of the loan is exempted from tax payment. The sub-clauses in this category are:
  • If the loan has been taken for a self-occupied property, then you can claim exemptions of up to Rs.2 lakh.
  • If you took a loan for purchase or construction (not renovation) of a property before actually buying or completing its construction, you can still claim the interest. You can seek deductions on the interest paid before the construction or purchase is completed, in 5 equal instalments, from the year in which the house is bought or the construction is completed.
  • If the loan is taken for renovation or reconstruction of a house, you cannot claim tax exemption until the renovation is completed.

To avail this deduction, you need to compute the interest amount you have to pay to the bank or financial institution that you took the loan from, separate from the principal repayment. It does not matter whether you have actually paid the amount to the financier – you can get exemption for the complete annual interest amount.

Exceptions under Section 24

  • If the house is not occupied by you, you can claim exemption for the whole interest amount that you are paying, without any upper limit.
  • If the house is not occupied by you because you live in another town due to your employment or business, or you live in another property or rented property in the city of your employment, then you can claim tax exemption on interest payment only up to Rs.2 lakh.
  • There is no deduction for any brokerage or commission for arranging the loan or tenant.
  • You have to buy or complete construction of the house within 3 years of taking the loan for you to be able to claim maximum deduction on the loan interest amount. If the construction or purchase is not complete within 3 years, you will be able to claim only Rs.30,000 instead of Rs.2 lakh.
  • You must have an interest certificate for the loan that you are taking.

Deduction under Section 80C

Individuals who purchase a new house can claim deductions under section 80c of the Income Tax Act. Under this clause, deductions can be claimed for stamp duty and registration charges, which could add up to around 10% of the total cost of a house. Deductions claimed under this section are subject to the condition that they do not exceed Rs 1.5 lakh.

Individuals can also claim a deduction towards any other expense during the process of transfer of property. Homeowners should keep in mind that this is applicable only for new residential properties.

Capital Gains Tax on Property:

Capital gains tax refers to the tax levied on the profit which is the outcome of a property sale. Capital gains tax can be a major source of wealth drain if not handled smartly. A simple way to handle this is to purchase a new house from the proceeds of a property sale, keeping in mind that such property should be purchased within two years of sale. Proceeds from a property sale can also be used to construct a house, ensuring that capital gains tax on property doesn’t become too taxing.

FAQs on Property Tax

  1. Is property tax decided by the central government?
  2. No. Property tax is determined by your local administration – that is, urban local bodies such as Municipal Corporation and similar organisations.

  3. My house owner says I as a tenant should pay the property tax. Is that legal?
  4. No. In certain countries tenants are liable to pay property tax but in India the house owner has to pay the tax. If your house owner is forcing you to pay this amount, then you can sue him in the civil court.

  5. Is there any way I can get exemption from property tax?
  6. You may get a property tax exemption based on your age (if you are a super senior citizen, for example), net income of the individual, type of property, location of property (if it is located in a famine zone or such affected regions), history of public service or value of the taxable property. If you have a vacant plot of land, you don’t have to pay property tax on it. You need to check with your local administration for the details.

  7. Why is my property tax assessment higher than the value of my property?
  8. Either you are not aware of the market value of your property, or your assessment is wrong. It is best to approach your local administration and clarify. The tax bill will also give you a clue on why the tax amount is high.

  9. Can I make property tax payments online?
  10. This depends on your municipal authority. If they allow online payment of property tax, you can make use of that facility. Bengaluru, for example, has recently started allowing property tax payments online.

News About Property Tax

  • Taxpayers' Association Files a Lawsuit Against the New Property Tax

    The Taxpayers' Association has filed a lawsuit in the High Court challenging the Municipal Act's changes for collecting property tax based on capital value. Representatives of the Urban Citizens' Forum indicated in a meeting on Thursday, 16 September 2021 that the Act's changes were unconstitutional and that a writ petition had been filed in High Court on 14 September 2021.

    22 September 2021

  • More than 50,000 people who paid their property tax to get a rebate of 5%

    The Nagpur Municipal Corporation (NMC) has provided rebates of 5% to the Nagpur property tax payers who have paid the due taxes for the current fiscal year from 1 July.
    As many as 52,420 people have been provided with the rebate of 5% by the NMC for their property tax payment. This rebate will be adjusted and forwarded to the next fiscal wherein the overall tax burden will be cut down on the basis of the rebate.

    25 August 2021

  • Online Property Tax Payment Facility Launched by MUDA

    B.A. Basavaraj, Minister for Urban Development, launched Mysuru Urban Development Authority’s (MUDA) online portal for property tax collection on Saturday, 17 July 2021. The online portal allows property owners from MUDA layouts and MUDA-approved layouts to pay their house tax and vacant site tax online. This launch is being considered a major milestone for MUDA, which has been collecting property tax through a challan system since 1991.

    19 July 2021

  • MC Chandigarh receives Rs.56.3 crore in property taxes

    Commercial and residential properties in the city of Chandigarh will be paying their property tax to the Municipal Corporation (MC) of Chandigarh. MC of Chandigarh will send tax bills to almost 1.50 lakh properties in the city.

    MC of Chandigarh has already received Rs.56.3 crore in taxes for the year 2020 which is more than the annual target of Rs.48 crore.

    10 March 2021

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