What is a Property Tax?
Property tax is the tax payable by real estate owners to local governments or municipal authorities, such as panchayats or municipal corporations. The tax applies to:
- All commercial, industrial, and residential properties located in rural areas.
- Agricultural land and buildings are exempt from this taxation.
The Government uses property tax for the maintenance and development of public services and local civic amenities.
Different Types of Property/House Taxes
Property tax is levied on all types of properties and is based on the type of property. The Government classifies the following types of properties for ease of estimation and calculation:
- Land, which includes land without any constructions or improvements.
- Improvements to the land, including improvements made to the land in the form of construction, such as buildings, warehouses, and godowns.
- Personal property, which includes all man-made movable property, such as trucks, buses, cars, etc.
- Intangible property, which includes the ownership of properties that do not have a physical substance, such as copyrights, patents, royalties, etc.
How are property taxes determined?
Two factors that determine the calculation of property taxes are: the assessed value of the home and the applicable tax rate. Assessors evaluate the property's worth by considering factors such as location and condition. The tax rate, set by local governing bodies, is generally a percentage of the property's valuation.
For example, if a home is valued at ₹80 lakh and the tax rate is 1%, the homeowner would owe ₹800 in annual property taxes. Again, since tax rates and property values vary by location, the amount due can differ significantly. Municipal corporations set their own tax rates. Hence, the amount differs across cities and states. Urban areas typically have higher tax rates than rural areas.
Different Methods to Calculate Property Tax in India
Municipal corporations in various cities and localities employ different methods to calculate property taxes in accordance with their regional policies. There is no single, uniform property tax law or rate across the entire country. The calculation varies from state to state, with no specific method or formula. Therefore, individuals have to consider the taxation system of the particular state they are purchasing land in. Here are some of the standard techniques used by local or municipal corporations to calculate property tax in India:
Unit Area Value System
Property tax, as per the Unit Area Value System, is calculated based on the price per unit of the built-up area of the property multiplied by the size of the built-up area of the property. The price per unit of the property depends on its location, type of construction, intended use, and the value of the land. Cities such as Kolkata, Delhi, Bengaluru, Hyderabad, Patna etc., employ this method for calculating property taxes in India.
Capital Value System (CVS)
Under the Capital Value System, tax is charged as a percentage of the property's market value. The State government determines the market value of the property based on its location and publishes it on public platforms, which are revised and updated annually. The Mumbai Municipal authorities follow this method.
Annual Rented Value System
The Annual Rented Value System calculates property tax based on the property's yearly rental value. The rental value is determined by the municipal authority based on the location, size and condition of the property, rather than the actual rent collected on the property. This method is followed in cities like Chennai and Hyderabad.
Key things every homeowner should know about property taxes
Property tax is a recurring tax levied by municipal authorities on real estate (including residential and commercial properties). These taxes play an important role in supporting community services. They help finance police, schools, road maintenance, fire departments, local administrative functions, and public parks, etc. Without property taxes, municipalities would struggle to maintain essential services and infrastructure.
Here are a few things you must know:
Ongoing expense:
Property taxes are a recurring cost. They may rise as real estate values increase. Planning for these changes can help homeowners avoid the financial strain.
Direct tax payment:
If there is no active mortgage, the homeowner is responsible for making property tax payments directly to the local tax office.1 For example, if you have a house in Agra, then as a city property/ house owner, you will have to pay the tax to the local government organization in Agra called Agra Nagar Nigam.
Mortgage and tax payments:
Those with a mortgage may have their property taxes included in monthly loan payments. Lenders often set aside a portion to cover property taxes on time.
Payment deadlines:
This is super important. You are typically required to make semi-annual or annual property tax payments. These dates can vary from year to year and state to state. Ensure you check in with the local government's schedules to ensure timely payments.
Challenging the assessment:
In case a property is overvalued, homeowners can file an appeal to request a reassessment. A clear, transparent, and successful appeal can help you with lower tax liabilities.
Payment (when and how):
As stated earlier, most municipal corporations allow property tax payments to be made annually or semiannually. 1 Additionally, there are two payment methods: online and offline. Most municipal websites have now made it easy to process digital payments. All you need is a stable internet connection and all related documents. For an offline method, payment can be made at designated municipal offices.
Consequences of not paying on time:
Ignoring property tax payments can lead to serious consequences, including heavy fines, penalties, and/or legal action. Late fines will come with penalties. Ensure you follow up on the deadlines. It will help you avoid financial and legal trouble.
Exemptions on property taxes in India
Some property owners are eligible for partial or complete tax exemptions. Some of the standard deductions include:
Tax Deduction on Home Loan Interest:
Section 24 allows a tax benefit of up to ₹2 lakh per year on interest paid for a self-occupied home loan. The entire interest on the home loan can be deducted for rented properties.
Tax Deduction on Principal Repayment:
Section 80C allows a tax benefit of up to ₹1.5 lakh on principal repayment. However, it only applies if the property is held for at least 5 years and is not sold within that period. Take a look at the conditions that apply:
The home loan should be taken specifically for purchasing or constructing a new residential property
You will be eligible for the tax benefit if you hold the property for at least five years after taking possession. If you sell before this period, it will result in the deduction being reversed and added to your taxable income in the year of sale.
Expenses such as stamp duty, registration charges, and other transfer-related costs can be claimed as deductions under Section 80C, with a cap of ₹1.5 lakh, for the specified financial year.
Tax Deduction for First-Time Homeowners:
First-time homeowners can claim additional tax benefits under Section 80EE and 80EEA. Section 80EE allows a deduction of a maximum of ₹50,000 every year on home loan interest for home owners with only one house for the loan period of April 1, 2016, to March 31, 2017, offered by any financial institution or any housing finance company. However, the loan amount cannot exceed ₹35 lakh, and the property's value should be within ₹50 lakh; this must be a house in the claimant’s name.
Section 80EEA was introduced for affordable housing. It offers an extra ₹1.5 lakh deduction beyond Section 24(b), subject to the stamp duty value not exceeding 45 lakh. Section 80 EEA deduction is available only to individual taxpayers who are not eligible to claim deductions under Section 80EE. In short, these benefits help first-time buyers by reducing their financial burden and also promote affordable housing.
Key Takeaways
- Property tax is levied on all the tangible real estate properties, including buildings, both commercial or residential, land adjacent thereto, and improvements made to the land. Vacant lands are exempt.
- Property tax is usually imposed annually or semi-annually by the municipal corporation of a particular area and the amount of property tax is based on the area, property size, property value and the local tax rate.
- The tax collected is used for public services such as the construction and repair of roads, sewage systems, schools, buildings etc.
Conclusion
Property taxes are an undeniable part of homeownership. Hence, understanding the ins and outs of this concept can help you manage costs more effectively and save money. Furthermore, understanding how these taxes work, their impact on personal finances, and the available tax relief options can help you manage your obligations efficiently. Make sure you stay updated with property tax rules, check for exemptions you might qualify for, and always pay your taxes on time.
FAQs
What if I don't pay property tax?
Failing to pay property taxes can result in penalties and other legal consequences. It is recommended that you pay your property tax on time.
How can I pay property tax online in India?
To pay property tax online, visit the official website of the local municipal corporation where the property is situated, and register the details of your property. Then generate the property tax bill and pay the amount shown via debit/credit cards, net banking, or UPI.
Who is responsible for paying property taxes – owner or tenant?
The owner of the property, whose name is registered, is responsible for paying property tax. The tenant typically does not pay property taxes.
Is property tax different from house tax?
House tax is a subset of property tax and is often used interchangeably with it. However, property tax includes both land and buildings, whereas house tax in India specifically covers tax on residential properties.
Can property tax be paid in installments?
Property tax can be paid in installments as may be allowed by the municipal corporation of the area in which the property is situated. You can check the local rules on the municipal corporation's website for the option to pay property tax in installments.
References:
- https://www.fao.org/4/y4313e/y4313e05.htm
https://www.municipalcorporationmandi.in/Property_tax.aspx
https://www.hindustantimes.com/business-news/how-property-tax-is-calculated-in-india/story-Ld5XlZwJamM0ryJChruDTK.html?utm_
https://economictimes.indiatimes.com/definition/property-tax?from=mdr
https://paytm.com/blog/bill-payments/municipal-bills/how-to-pay-property-tax-online/
https://blog.maadiveedu.com/hysense/property-tax-on-rental-properties-in-maharashtra--rates-payment--exemptions
https://www.nobroker.in/forum/is-house-tax-and-property-tax-same/
https://timesofindia.indiatimes.com/city/ahmedabad/now-you-can-pay-property-tax-in-six-instalments/articleshow/4352015.cms
