Property Tax

Property tax is also referred to as house tax. It is implied on real estate owners by various municipal authorities such as a municipal corporation, municipality, or panchayat in all the rural and urban areas of India. The duty of a municipal authority is to maintain the quality of basic public facilities like the sewage system, roads, and streetlights in your area. The municipal authority imposes the property tax to use the money for maintenance.

The property tax has to be paid either annually or semi-annually by the owner of your property. The amount of the tax depends on your property, but it also varies depending on where you live. Different states and cities have separate property taxes that are implemented on the properties within the governed areas. The tax might vary within the same city too, depending on the municipal authority of the city.

In most places of the country, this tax is the main source of revenue for the local authorities. The property tax is implemented on both commercial and residential buildings, along with the lands that are attached to them. Any development made on the land is also taxable. However, the property tax is not applied to empty plots if there is no building adjoined to the land.

1. Importance of Paying Property Tax

If in case a third-party raises a fraudulent dispute over the ownership of your property, you can furnish the property tax receipt as proof of the fact that you are the owner. A property tax receipt is also particularly important to the new buyer of a home as it is only possible to transfer the ownership of a property to the new buyer once all dues have been paid off.

If you are the owner of the property and have to get it registered with the local municipal bodies, one of the documents that they will ask for as proof of ownership is the property tax receipt. You will be required to furnish it along with documents such as the sale deed, clearance from the society, an address proof, and a duly filled application form. If you plan on mortgaging your property, you will need to submit the property tax receipt at the time of applying for a loan against that property as well.

There are four distinct categories of properties. They are as follows:

• Land plot

• Enhancements made to the land such as godowns and gardens

• Personal property, such as bus, machinery, cranes, etc.

• Intangible property, such as intellectual property (IP)

Below are the To do so, follow the below-mentioned steps:

• Step 1: Login to the official portal of your respective municipality/city corporation.

• Step 2: Look for the ‘Property Tax’ tab and help yourself to the payment option.

• Step 3: Choose the correct form (either 4 or 5) on the basis of the category under which the property falls. These forms are used to determine if you or anyone has made any kind of changes to the 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 the option of clearing tax payment backlogs as well.

• Step 5: You will then be needed to fill in your property identification number and submit any other relevant document regarding the property along with the owner’s name.

• Step 6: Once you have entered the relevant information, you can choose the payment mode.

• Step 7: Finally, once the payment has been made, you can take a printout of the challan for future reference.

The links to pay property tax for every municipal corporation are listed below.

Property tax gives relevant local municipal bodies the funds to provide services such as keeping the neighbourhood clean, providing water supply, and maintaining the drainage systems. Additionally, it is your legal obligation as a property owner to pay the same. Failure to do so can invite legal action from the municipal bodies seeking to recover the due amount.

Some variables that are taken into account while calculating property tax are as follows:

• The locality

• Property size

• Property status (under-construction or ready to possess)

• Gender of the owner (female property owners may get a concession)

• Age of the owner (Senior citizens may get to enjoy discounts on property tax)

• The range of civic services/facilities provided by the local municipal bodies

After every variable is accounted for, the local municipal bodies use the following formula to calculate property tax:

Property Tax = Base value × built-up area × Age factor × building type × category of use × floor factor

Municipal authorities do the property tax calculation and the taxation value depends on the worth of your property. Primarily, the calculation is done in three ways:

• Capital Value System (CVS): Under this system, the property tax is implemented as a certain percentage on the current market valuation of your property. The value is decided by the government and it depends on multiple factors like property location, type and size. The updated values are then published to keep you informed about the changes. CVS is used in the metropolitan city of Mumbai.

• Rate-able Value System (RVS) or Annual Rental Value System: The Rate-able Value System (RVS) is used to implicate taxes on a property based on its annual rental value. However, you must keep in mind that the value might not be exactly the amount of rent you collect from the property every year. The annual rental value of your property is determined by a municipal authority and the tax liability depends on the same.

Various aspects related to the property determine this value. The municipal authority decides the value depending on the size and location of the property. The condition of your property is also taken into account by the authority to determine the value. Apart from these, certain other factors are considered. These include the property’s proximity from necessary facilities and prominent landmarks.

To put it simply, the Annual Rental Value of your property is not what you actually earn from the rent. It is the value as per the municipal authority according to the various aforementioned aspects such as the property’s size and location. Cities like Chennai and Hyderabad follow this property taxation system.

• Unit Area Value System (UAS): This is one of the most commonly used property taxation systems in India. The Unit Area Value System (UAS) is used in cities like Patna, Hyderabad, Kolkata, Delhi, and Bengaluru.

Under the UAS, the taxation is imposed on per unit value of the property’s built-up area. The per-square-foot monthly price of the property is determined based on many different aspects. The price varies depending on the area the property is located in, usages of the property, and the price of land in the area. Once the anticipated returns of your property are determined, the value is multiplied by your property’s built-up area.

Let us define what does the term ‘Income’ mean in this particular context. It is as follows:

• If you are renting out your home(s), then the rent you will receive from them will be considered as part of your income.

• If you have more than one home, then their Net Annual Values will be considered as your income. The only exception to this rule will be the house that you are living in.

Any income derived as rent and the annual value of additional houses will be taxable after deductions made under Section 24 of the Income Tax Act, 1961.

1. Deductions under Section 24 of the Income Tax Act

There are basically two types of deductions that can be claimed under Section 24 of the Income Tax Act. They are:

• Standard Deduction: This exemption is allowed to every taxpayer. In this case, a sum equal to 30% of the net annual value does not fall under the tax limit. This will not be applicable to the home that you are occupying.

• Interest on Loan: If you have taken a house loan, the interest you pay yearly is exempted from tax. The sub-clauses with regards to the same are:

• If the loan is for a self-occupied property, you can claim an exemption of up to ₹2 Lakhs

• If you took a loan for either buying or constructing a property, you can still claim the interest before actually buying or completing its construction. You can seek deductions on the paid interest before the purchase or before construction is finished in 5 equal instalments, starting from the year in which the home is either bought or constructed fully

• If the loan is taken for renovation or reconstruction purposes, no tax exemptions are available until the renovation is complete

To avail this deduction, you will need to compute the payable interest amount to your lender. Even though you have not actually paid the amount yet, you can get an exemption for the total annual interest amount.

• If you do not occupy the house that you have purchased with the home loan money, you can claim exemptions for the whole interest amount without any limit.

• If you do not occupy the house because you live in some other city for work purposes and live on rent, you can claim tax exemption on the interest payment of only up to ₹2 Lakhs.

• No deductions for brokerage payment is available.

• Note that you have to buy or finish the construction of the house within 3 years of taking the loan for you to be able to claim maximum deduction.

• If the construction/purchase is not completed within that time frame, you will be able to claim only ₹30,000 as a deduction instead of ₹2 Lakhs. Possession of an interest certificate at the time of claiming the deduction is a must.

You can avail a tax deduction for paying stamp duty and registration charges while buying a new home under Section 80C of the Income Tax Act of 1971 of up to ₹1,50,000. You can also claim this deduction for any expenses incurred while buying the property. But, you should keep in mind that these deductions can only be claimed if you are buying a new residential property.

• The tax charged on the profit made from selling a property is called capital gains tax. Capital gains tax can be a significant cause of wealth loss if it is not managed properly. To save on the same, you can simply buy a new home with the profits of the sale.

• However, the property must be purchased within two years of the selling date. The proceeds can also be used to build a dwelling, which will reduce the amount of payable capital gains tax on the property.

If you do not pay your property tax on time, you will have to pay it along with a penalty. This penalty can be anywhere between 5-20% of the due amount. Note that the percentage you will have to pay as a penalty differs from state to state. Some states do not even charge an interest on late property payments, hence you must check the same with your local municipal authority.

There are certain scenarios under which the property owner may enjoy a complete waiver of the property tax. Those are as follows:

• If the property is owned by a religious organisation or the government, no property tax needs to be paid

• If the property owner is a super senior citizen (Above 60 years of age), he or she may get an exemption.

• If the property owner is a former employee of any of the defence services

• If the property owner is a family member of a martyr of the Indian Army, BSF, Police Service or the CRPF or the fire brigade

• If the property owner is an educational institute

• If the property is used for agricultural purposes

If you do not pay your property tax on time, depending on the state that the property is in, you will be charged a penal interest rate of anywhere between 1-2% per month. These rates are subject to constant change. You must check on the official website of the relevant municipal corporation for the interest rate applicable to you.

It is your moral and legal obligation to pay your property tax on time and that too timely. Failure to do so can invite serious financial and legal consequences. You can learn more about property tax and other kinds of charges connected to property purchases on Bajaj Markets. Also, if you plan on buying a new home, you can take a home loan from any of the lending partners of Bajaj Markets.