What is Property tax? Different types of Property tax in India and how to calculate it?

Know about property tax in India and the tax calculation methods used by various state governments. Some important points that the citizens should know in order to follow the procedures and avoid penalties.

Understanding property tax in India

Property tax is the annual amount paid by the owner of a property to the government through the municipal corporation. The tax amount is based on the area, construction, property size, building, etc. Property tax also includes taxes like lighting tax, water tax, and drainage tax.

Types of Property

  1. Land: any size of land without its construction or any form.
  2. Improvement on Land: With its buildings or other constructions. 

Property Tax in India 

The local municipalities evaluate and collect taxes from citizens on their property. The money is used to build public amenities, including tap water supply, government-owned hospitals, schools, public parks, etc. The property tax depends on the location, the challenges for the local municipality, and how much it costs to provide proper services in the area. By and large, the costs are kept at a minimum with minor variations throughout India. Property tax can be paid annually or bi-annually, both offline and online.

Also Read: Tax Implications on Jointly Owned Property

Calculation of Property tax in India

The property tax varies from municipality and location apart from other factors like urban, semi-urban or rural. Property tax is calculated after the local municipality representative inspects the property in the area. The area, the nature of the structure, concrete or hutment (kaccha/pucca), the area of the structure, its occupancy, amenities provided, like a garage, etc. Once the items used by the property owner are listed, the municipality applies the formula designed by it to calculate the tax that the owner has to pay before the deadline.

3 methods of evaluating property tax

  1. Capital Value System (CVS): Most cities apply the CVS. The tax is calculated on the property's value and applies a percentage determined by the municipality rules. The property's market value depends on its location and the level of demand among the citizens. Mumbai adopts this method of calculation.
  2. Unit Area Value System (UAVS): In this method, the built-up area is considered for calculation and not its location. Patna, Kolkata, Delhi, etc., follow this method. 
  3. Annual Rental Value System (ARVS) or Rateable Value System (RVS): The rental value is taken into consideration, including the condition of the property concerned. The evaluation is also done on the proximity of the property to various landmarks. Chennai and parts of Hyderabad follow this method. 

Interest charged on delayed Property tax payments

Fines or penalties are not fixed, and municipalities are given the right to levy fines as per their own policy, which could be anything from 5% to 20%. Earlier, people avoided dues, so there would often be many pending dues, but now with online payment facilities, tax dues are easily retrieved and sorted. Some states have waived off penalties, and Bengaluru decided to slash fines from 20% to 10%.

Also Read: 5 Popular Ways To Transfer Your Immovable Property

Taxable income on the property

Tax on income from the property is calculated on the property's rental value after deduction of municipal taxes and a standard deduction of 30%. Suppose the rental value is Rs. 10,000, then the tax on income on the property will be calculated as follows: 

Rent x 12 months minus (-) municipal taxes = 10,000 x 12 = 1,20,000 – minus municipal taxes paid = Net annual value. The tax will then be on the net annual value thus arrived. 

  1. If your house has been vacant, then only the total amount received as rent will be considered and not the full 12 months.
  2. If no rent has been received for the full year and you have been paying taxes, then you can offset this loss against your income from other properties or your annual income in the same fiscal year. Alternatively, you can accrue this loss for a maximum period of 8 years.

Tax deductions from income on the property

  • Tax is applicable only on property that is on rent.
  • A standard deduction of 30% is exercised on the Net Annual Value of all houses owned, and then the income is taxed. 

Capital Gains Tax

This tax is levied on the profit from the resale of the property. Suppose you bought a new flat for Rs 40 lakhs and sold the flat after three years for Rs 60 lakhs, then the capital gain tax will be on Rs 20 lakhs. Capital gains tax, in this case, will be applied at the rate of 20%. What can also be done is you can buy another property from the profits of the sale of the property (in this case, Rs. 20 lakhs) within two years after the date of sale. This process of re-investing the profit amount into another property helps to avoid capital gains tax of 20%. 

Property tax is the annual amount paid by the owner of a property to the government through the municipal corporation. The tax amount is based on the area, construction, property size, building, etc. Property tax also includes taxes like lighting tax, water tax, and drainage tax.

Types of Property

  1. Land: any size of land without its construction or any form.
  2. Improvement on Land: With its buildings or other constructions. 

Property Tax in India 

The local municipalities evaluate and collect taxes from citizens on their property. The money is used to build public amenities, including tap water supply, government-owned hospitals, schools, public parks, etc. The property tax depends on the location, the challenges for the local municipality, and how much it costs to provide proper services in the area. By and large, the costs are kept at a minimum with minor variations throughout India. Property tax can be paid annually or bi-annually, both offline and online.

Also Read: Tax Implications on Jointly Owned Property

Calculation of Property tax in India

The property tax varies from municipality and location apart from other factors like urban, semi-urban or rural. Property tax is calculated after the local municipality representative inspects the property in the area. The area, the nature of the structure, concrete or hutment (kaccha/pucca), the area of the structure, its occupancy, amenities provided, like a garage, etc. Once the items used by the property owner are listed, the municipality applies the formula designed by it to calculate the tax that the owner has to pay before the deadline.

3 methods of evaluating property tax

  1. Capital Value System (CVS): Most cities apply the CVS. The tax is calculated on the property's value and applies a percentage determined by the municipality rules. The property's market value depends on its location and the level of demand among the citizens. Mumbai adopts this method of calculation.
  2. Unit Area Value System (UAVS): In this method, the built-up area is considered for calculation and not its location. Patna, Kolkata, Delhi, etc., follow this method. 
  3. Annual Rental Value System (ARVS) or Rateable Value System (RVS): The rental value is taken into consideration, including the condition of the property concerned. The evaluation is also done on the proximity of the property to various landmarks. Chennai and parts of Hyderabad follow this method. 

Interest charged on delayed Property tax payments

Fines or penalties are not fixed, and municipalities are given the right to levy fines as per their own policy, which could be anything from 5% to 20%. Earlier, people avoided dues, so there would often be many pending dues, but now with online payment facilities, tax dues are easily retrieved and sorted. Some states have waived off penalties, and Bengaluru decided to slash fines from 20% to 10%.

Also Read: 5 Popular Ways To Transfer Your Immovable Property

Taxable income on the property

Tax on income from the property is calculated on the property's rental value after deduction of municipal taxes and a standard deduction of 30%. Suppose the rental value is Rs. 10,000, then the tax on income on the property will be calculated as follows: 

Rent x 12 months minus (-) municipal taxes = 10,000 x 12 = 1,20,000 – minus municipal taxes paid = Net annual value. The tax will then be on the net annual value thus arrived. 

  1. If your house has been vacant, then only the total amount received as rent will be considered and not the full 12 months.
  2. If no rent has been received for the full year and you have been paying taxes, then you can offset this loss against your income from other properties or your annual income in the same fiscal year. Alternatively, you can accrue this loss for a maximum period of 8 years.

Tax deductions from income on the property

  • Tax is applicable only on property that is on rent.
  • A standard deduction of 30% is exercised on the Net Annual Value of all houses owned, and then the income is taxed. 

Capital Gains Tax

This tax is levied on the profit from the resale of the property. Suppose you bought a new flat for Rs 40 lakhs and sold the flat after three years for Rs 60 lakhs, then the capital gain tax will be on Rs 20 lakhs. Capital gains tax, in this case, will be applied at the rate of 20%. What can also be done is you can buy another property from the profits of the sale of the property (in this case, Rs. 20 lakhs) within two years after the date of sale. This process of re-investing the profit amount into another property helps to avoid capital gains tax of 20%. 

Expert Article block example

NEWSLETTER

Related Article

Premium Articles