All about Property Tax

Table of Contents

What Is Property Tax?

Property Tax, also sometimes known as House Tax, is the tax imposed on real estate owners by the municipal authorities like panchayat, municipality or Municipal Corporation. It is used for maintenance and upkeep of the local civic amenities of the area, like roads, sewage system, lighting, parks, and other infrastructure facilities. It is usually levied on all real estate, including buildings (residential or commercial), attached land, and improvements made to the land, but not on vacant plots of land with no adjoining building.

Types of Property Tax

Properties are classified to help the government streamline the process of estimating taxes basis certain specific criteria. Property in India has been divided into 4 classifications.

  • Personal Property: Portable man-made property like cars, buses and cranes
  • Land: Land in its rudimentary form, devoid of any form of construction
  • Improvements and upgrades made to land: Man-made constructions on land that cannot be moved like buildings
  • Intangible Property: Property that is not in its tangible form

How to Calculate Property Tax

The calculation of Property Tax varies basis the following:

Factors that have to be taken into consideration while calculating Property Tax:

  • The state or Municipal Corporation, type of property, etc.
  • Calculation methods vary among different civic corporations
  • Accurate details regarding the locality, status of occupancy – rented or self-occupied, type of property land, residential, commercial, infrastructure offered, floor and carpet area, number of floors of the construction, etc.
  • The tax amount can be automatically calculated on the municipal corporation website when you mention the required details accurately

The standard formula that is followed during the calculation of Property Tax is:

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

It is important to note that the amount of tax payable in the country depends on where the property is situated, as taxes vary from one state to another. Civic corporations use different techniques to assess the tax. The general overview of such calculations, however, is the same.

Late payment towards Property Tax is liable for additional charges as a fine, which varies from state to state. Late payment charges between 5% and 20% can be waived or slashed basis individual state policies.

Ways of Calculating Property Tax

  • Capital Value System (CVS): The tax is levied as a percentage of the market value of the property. This market value is determined by the government and is based on the locality of the property. The market value is revised and published yearly. Mumbai follows this system.
  • Annual Rental Value System or Rate able Value System (RVS): Under this system, the tax is calculated on the yearly rental value of the property. This is not necessarily the actual rent amount being collected; rather it is the rental value decided by the municipal authority based on the size, location, condition of the premises, proximity to landmarks, amenities etc. Examples of municipalities following this system of property tax include Hyderabad and Chennai.
  • Unit Area Value System (UAS): In this system, the tax is levied on the per unit price of the built-up area of the property. This price is fixed (per square foot per month) based on the expected returns of the property as per its location, land price, and usage, and is then multiplied with its built-up area. Municipalities like Delhi, Kolkata, Bengaluru, Patna and Hyderabad follow this system for property tax calculation.

Things you need to know when Property Changes hands

Approval Process

Firstly, breathe free. We all shudder at the thought of dealing with government documents, but the process of getting your house tax document all straightened out is actually a simple one provided you have all the necessary documents. For a change in the name, the copy of the following documents will be essential:

  • Receipt of tax last paid
  • Attested copy of the sale transaction deed
  • No Objection Certificate from the associated housing society
  • Duly filled application form with signatures 
  • Submit these documents to the Commissioner of Revenue and wait for approval after verification, which usually takes around 15 to 30 days.  

Mutation of Property

Mutation of property is also known as ‘dakhil kharij’ and is a process that enables the government to charge taxes to the new owner. This process helps the property owner to transfer the title ownership after the property is either purchased or inherited.  

The mutation procedure includes giving an application along with the non-judicial stamp. The application must have information regarding the property and should be submitted to the area Tehsildar. While the procedure and necessary documentations may vary from state to state, a No Objection Certificate (NOC) is essential for the property area whereas for inherited property, in the case of old property owner’s death, an affidavit of the original death certificate will be necessary.

Taxes are a necessary evil, a great man is supposed to have said. Whether we like it or not, complying with the Indian bureaucracy and its legal structure is likely to save many a headache later on. When it comes to property, a little knowledge is never a dangerous thing.   

Things every Homeowner should know about Property Taxes

Owning a home is a wonderful feeling but it comes with the responsibility of paying the property tax. You need to know how much will your property tax cost and be prepared accordingly. Here are a few things you as a homeowner should know about property taxes:

  1. You could incur penalties for not paying your property tax- The penalties differ from state to state but you could lose your house if you don’t pay your property tax on time.
  2. You can pay your property tax by credit card- Some cities allow you to pay your property tax by credit card. However, it may not always be a sensible option. There’s usually a 2-3% fee on the transactions and when you are paying a bigger sum like the property tax, it may add up to be a lot.
  3. You get a tax break because of your property taxes- Owning a Home can get you tax deductions and rebates on your next bill. You can deduct what you paid in property taxes throughout the year when you file your federal income tax return. This tax break reduces the amount of tax you owe, and it can even help you qualify for a refund. Ensure you pay your property tax on a timely basis.
  4. You can pay the tax through Escrow- Many mortgage companies make paying property taxes more manageable by paying your property taxes out of an escrow account you fund by paying 1/12 of your tax bill with each monthly mortgage payment. Just be sure to follow up every now and then to check that your tax bills are being made on time, since your lender is paying these bills on your behalf.
  5. You may be eligible for a property tax exemption- In some cases, like military veterans, you are exempted from property taxes. Exemptions always vary from state to state. Homestead exemptions reduce property taxes for all homeowners in a particular jurisdiction by sheltering a certain amount of a home’s value from tax, according to the Institute on Taxation and Economic Policy. 
  6. You should try to get an estimate of your property tax before you buy the property- You can contact the local tax assessor to understand the property tax you will have to pay. Learn as much as you can about property taxes and the income tax rates when buying a house so you know how much budget to allocate towards it.

How to Pay Property Tax?

You can pay your property tax at the municipal corporation (MC) office of your area, or sometimes at the designated banks in affiliation with the MC. You may need to provide the property tax number or Khatha Number to identify your property. These days, most municipal taxes in India can be paid online on the corresponding municipal authority websites, making it much more convenient for the property holder. Certain municipal authorities may offer some exemptions from payment of the property tax based on factors such as location, age, net income of the owner, type of property, etc. It is prudent to carefully verify with the local administration for such information and assess your tax liability carefully.

Property tax needs to be paid annually, and late payment can attract a fine in the form of interest on the amount due, which can be up to 2% per month. It is also important to note that the onus of paying property tax is with the owner, and not the occupant of the property.

Guidelines for Online Payment of Property Tax

You can pay your Property Tax online through the state or municipal website by filling in your Property Tax Number or Revenue Survey Number or Khatha Number. Here are some guidelines that you need to know if you prefer paying your Property Tax online.

  • If there is a balance after you have paid your tax in advance after adjusting the dues from the previous year(s), if any, you will be paid back through DD or cheque post verification.
  • Property tax for a particular financial year will include the pending amount or remaining dues from previous year(s), if any.
  • If you opt to pay the property return for the existing financial year in two instalments, you can use the same form for the second instalment as well.
  • If you opt to pay the entire tax amount in one instalment, you will be eligible for a 5% rebate.
  • Payment for the arrears for the previous year(s) can be made only after the challan for each of the previous year(s) have been generated.
  • Receipt for payment through cash and DD is generated instantly, while receipt for payment through cheque will be generated only after the cheque amount has been realised.
  • An interest of 2% per month is calculated automatically on the tax amount for the defaulted period.