What is Property Tax and How it Works?

Property Tax is defined as a levy imposed by local governments on real estate or immovable property, encompassing land and buildings. This tax, grounded in the property’s assessed value, serves as a crucial revenue source for funding local services and amenities, spanning from educational institutions and road infrastructure to public safety initiatives. The computation of property tax typically involves applying a predetermined tax rate to the property’s assessed value, and in certain jurisdictions, it extends to tangible personal property. Many regions offer exemptions and relief programs, catering to specific groups such as seniors, veterans, and individuals with disabilities, to alleviate the property tax burden for eligible residents. The assessed value of a property is commonly derived from its market value, representing the amount it would fetch under standard market conditions. It is important to note that property taxes are predominantly imposed by local entities like cities, counties, and school districts, distinguishing them from state-level taxation.

Geeky Takeaways:

• Property taxes are levied by municipal governments on real estate, including land and buildings.
• This important source of local revenue funds services and amenities for communities.
• To provide relief, many localities exempt or reduce taxes for groups like seniors, veterans, and disabled residents.

Types of Property

1. Movable Property: Movable Property refers to assets that can be relocated without causing damage. Various legislation provides definitions for movable property. For instance,

• According to Section 2(9) of the Registration Act, 1908, the movable property encompasses standing timber, growing crops, grass, and property of every other description, excluding immovable property.
• Section 22 of the Indian Penal Code, 1860, expands this definition, including corporeal property of every kind except land and items permanently attached to the earth.
• Section 3(36) of the General Clauses Act of 1897 further defines movable property as property of every description, except immovable property.

2. Immovable Property: Immovable property refers to assets that cannot be relocated and are typically attached to the earth. Section 2(6) of the Registration Act of 1908 specifies that immovable property includes land, buildings, hereditary allowances, and rights arising from the land, among others. This category requires registration for properties valued over ₹100, and registration fees and stamp duty apply. For instance, immovable property may include ancestral joint properties, emphasizing its permanence and significance.

3. Tangible Property: Tangible property possesses physical existence and can be touched. This category includes movable property that can be relocated without causing damage. Examples of tangible property include electronic devices, vehicles, books, and furniture.

4. Intangible Property: Intangible property lacks physical existence and comprises assets with inherent or potential value that cannot be touched or felt. Examples of intangible property encompass intellectual property like stocks, copyrights, patents, and bonds.

5. Public Property: Public property is owned by the state for the benefit of its citizens. Managed by the government or assigned communities, these properties, such as government hospitals and parks, serve public utility purposes.

6. Private Property: Private property is owned by non-government entities for personal use or benefit. It can include tangible or intangible assets such as apartments, securities, trademarks, and private wells.

7. Personal Property: Personal property serves as a broad category encompassing all types of property. It refers to assets owned by individuals, whether tangible or intangible.

8. Real Property: Real property, synonymous with real estate, includes land and any developments on it. These developments, such as buildings, mines, and crops, are considered immovable property, representing a further classification of immovable property.

9. Corporeal Property: Corporeal property denotes tangible assets that can be touched and felt. It represents ownership rights in material things, including both movable and immovable property, and encompasses personal and real property.

10. Incorporeal Property: Incorporeal property refers to intangible assets, often known as intellectual property. This category involves legal rights over non-physical entities, such as copyrights and patents, which cannot be touched or felt.

What is Property Tax in India?

In India, property tax is an annual obligation imposed by the government on property owners and is administered by the local government or Municipal Corporation, depending on state authorization. The term ‘property’ encompasses land and its associated improvements, encompassing all tangible assets owned by individuals, ranging from self-owned residences to commercial spaces. The Indian government categorizes properties into groups to streamline tax assessment. The municipal corporation assesses and levies property taxes, typically on an annual or semi-annual basis, considering factors like construction, property size, area, and building specifications. The collected funds are predominantly allocated to public services such as sanitation, water supply, and maintenance of local infrastructure. Property tax rates, valuation methods, and assessment procedures vary among municipal authorities, utilizing diverse approaches like the CVS and the UAS.

How to Calculate Property Tax?

The property tax formula comprises various factors, and the property tax is determined by multiplying the base value with the type of building, age factor, floor factor, category of use, and the built-up area. Different municipal corporations employ distinct methods to compute property tax, but the fundamental principles of assessment, considering factors such as location, occupancy status (self-occupied or rented), property type (commercial, residential, or land), amenities provided, year of construction, type of construction (multi-story, pukka, single floor, or kutcha structure), floor space index, and carpeted square area, remain consistent. Based on these parameters, civic agencies apply a suitable formula to assess the property tax, which is as follows:

Property Tax = Capital Value × Tax Rate

where, Capital Value= Market Value of The Property × Weight For Construction Type × Total Carpet Area × Weight For The Age of The Building

Different Methods to Calculate Property Tax

1. Capital Value System (CVS): The CVS is a property tax calculation method employed in cities like Mumbai. Under this system, property tax is determined as a percentage of the market value of the property, as established by the state government. The tax is then imposed based on this percentage, providing a straightforward approach to property tax assessment.

2. Unit Area Value System (UAS): The UAS is utilized by municipalities in cities such as Patna, Bengaluru, Kolkata, Delhi, etc. This method involves levying tax on the per-unit prices of the property’s built-up area. The per-unit price is computed considering factors like usage, location, and land price. The actual tax amount is then calculated by multiplying the per-unit price by the total built-up area of the property, offering a more granular approach to property tax assessment.

3. Annual Rental Value System (ARV): Also referred to as the Rateable Value System, the ARV is employed in cities like Chennai and Hyderabad. This method calculates property tax based on the yearly rental value of the property. The tax is determined as a percentage of the net annual value, which is the rental value minus the property’s municipal taxes. The ARV system provides a unique perspective, considering the property’s rental income for tax assessment.

How to Calculate House Tax?

House Tax = Rate of Tax × Annual Value

Annual Value = Unit Area of Property × Unit Area Value × Occupancy Factor × Use Factor × Age Factor × Structure Factor

The Net Annual Value of a residential property is determined by subtracting the municipal taxes paid from its gross annual value. To illustrate, if a property owner earns ₹1,20,000 as rent and incurs ₹30,000 in municipal taxes, the Net Annual Value becomes ₹90,000. Subsequently, the property tax is levied on this amount. In the case of a vacant house during a financial year, only the income received as rent within that period is subject to tax. For instance, if a house generates ₹10,000 per month but remains vacant for 3 months, the gross value would be ₹90,000 (₹10,000 x 9), and the tax payable is calculated after deducting the municipal tax, typically at 30%. In situations where a house is unoccupied, incurring municipal taxes but generating no income, the property owner can offset this loss against income from other sources. This provision allows for a more nuanced approach to property taxation based on actual income and expenses.

How to Pay Property Tax?

1. Accessing the Municipality/City Corporation Website: To begin the property tax payment process, individuals should access the official website of the municipality or city corporation. This can usually be done by searching for the relevant local government portal through a search engine or by directly typing in the official web address.

2. Navigating to the Payment Option: Once on the website, users need to navigate to the specific section designated for property tax payments. This is commonly found under the “Property Tax” tab, which may be prominently displayed on the homepage or listed in a menu.

3. Selecting the Appropriate Form (Form 4 or 5): Upon entering the property tax section, individuals must carefully select the appropriate form for their property. Form 4 and Form 5 are typically provided each catering to specific categories of properties. The choice of form is crucial, as it determines whether there have been any changes, updates, or modifications to the property in question.

4. Determining the Assessment Year: After selecting the form, individuals are required to specify the assessment year for which they are calculating and paying property taxes. The assessment year is essentially the fiscal year during which the property taxes are applicable. Additionally, many municipalities offer a provision for clearing any outstanding property tax dues from previous years.

5. Providing Property Details and Identification: Following the assessment year selection, individuals must input various details related to their property. This includes entering the property identification number and supplying any other relevant documents, such as the property’s zone, type, and the name of the property owner. Accurate and up-to-date information is essential for a precise property tax calculation.

6. Selecting the Mode of Payment: Once all necessary property details are entered, individuals can proceed to the payment stage. Here, they are given the option to choose their preferred mode of payment. Common options include credit and debit cards and internet banking. Selecting the appropriate payment method is a critical step in ensuring a smooth and secure transaction.

7. Completing the Payment Process: After successfully making the payment, individuals should finalize the process by obtaining a printout of the generated challan. This document serves as tangible proof of the completed transaction and should be retained for record-keeping purposes. Additionally, it may be required for future reference or during property audits. Property owners are encouraged to keep this document in a secure place for easy retrieval when needed.

Frequently Asked Questions (FAQs)

1. How much is the property tax in India?

Answer:

In general, the percentage of property tax in India might vary between 5.00% and 20%.

2. Is local property tax to be paid every year?

Answer:

Yes, local property tax has to be paid every year. If you own residential property, you are liable to pay Local Property Tax (LPT) on November 1 each year.

3. Who is eligible for property tax in India?

Answer:

Owners of real estate properties in India are required to pay property tax. It is an annual charge passed by the Indian government on property owners. This tax is collected by the Municipal Corporation or the local government, whoever is authorized to do so in a given state.

4. What happens if you don’t pay property tax in India?

Answer:

Non-payment of property tax can lead to legal actions by municipal authorities, including issuing notices, imposing fines, and even auctioning the property to recover the unpaid tax amount.

5. Is property tax-deductible in India?

Answer:

According to Section 23 of the Indian Income Tax Act, 1961, the annual value of rental income for income tax computation allows for the deduction of taxes levied by any local authority for the property.