Have you ever wondered about how our country gets funds to run government schools, construct roads, and other facilities to provide us? This question has always been in my mind and as I grew, I understood that it is us who is directly or indirectly helping our country grow by PAYING TAXES. From buying chocolates to buying a property, we have been contributing a certain percentage of the sum towards the government fund. Thus, it is no wrong to say that running the country without us paying taxes would have been impossible.

You must have been paying taxes for a while but are you sure you know all of it?? It is our right to learn about where our money is going. And to do so, one needs to grab in-depth knowledge about taxes. So, let’s begin with

Types of Property Taxes

Direct Tax

Direct taxes are filed and paid by an individual directly to the government. It includes income tax, property tax, corporate tax, estate tax, gift tax, value-added tax, sin tax, and taxes on assets. For instance, every time you buy a property, you are directly paying a certain percentage of tax to the government

Indirect Tax

Indirect taxes are collected by the supplier and paid to the government. They are paid the moment a consumer buys a product. It includes sales tax, service tax, customs duty, toll tax, goods and service tax. For instance, every time you visit a restaurant, you must have seen SERVICE TAX added to the bill which is an indirect tax

Now that you have a brief knowledge about taxes, let me reveal to you my agenda of writing this article today. Knowing that there are so many types of taxes, in this article, I will be walking you through one of the major sources of income for the country i.e., “Property Tax”

Property tax

Property tax is the amount payable by the landowner to the municipal corporation or the local government for their respective cities.  

In simpler words, if you own a house, office building and other premises rented out to third parties, you are bound to pay the property tax.

Who can buy property in India?

If you are planning to buy a property anytime soon, then it’s better for you to first check whether or not you are eligible to buy any Indian property.

You can’t legally own property in the country if you are not an Indian and not a resident of India. For you to be a citizen, you have to stay in the country for a minimum of 183 days a year, so you are exempt from a tourist visa.

However, if you are a resident then you need not worry about anything as property buying would be way too easy for you. Also, you can buy property, regardless of whether you are an Indian national or not. And whether you’re an Indian national or you’re allowed to buy property even if you live abroad- unless you’ve become a citizen of Afghanistan, Bangladesh, Bhutan, China, Iran, Nepal, Pakistan, or Sri Lanka, in which case you aren’t.

What kinds of property taxes are payable in India?

Property taxes, in general, can be divided into two groups:

Sales taxes

 If you wish to sell or buy a house in India, then you are liable to pay the following taxes-

 Stamp Duty

  •  It is the principal tax paid when you buy a property.
  • Payable to the state government.
  • The rate of stamp duty varies quite widely between states, between 3% and 10%.
  •  Also, depending on the property itself, factoring in location, age, and other criteria, the rate varies
  • Must be paid promptly when the purchase is made, or you’ll have to pay interest on the value at 2% a month.
  • Payable by the buyer, not the seller. 

Registration Charges

  •  It is payable when you record the purchase of property with a registering officer. 
  • As a buyer, you will be liable to pay
  • The state government decides upon the registration charges, however, generally, the charges would be around 1%

Service tax

  •  It is payable if you buy a property that is yet under construction.
  • Payable to central government
  • Payable only on property purchase directly from developers and not on resale property purchase
  • charged at either 3.75% or 4.5% of the property value – the higher rate if the property is particularly large or expensive.
  • 15% service tax payable on certain construction charges
  • As a buyer, you will be paying the tax to the developer and the developer will be responsible for passing on the tax to the government
  • Not applicable on construction of a single residential unit such as Villa or Bungalow

VAT

  • Similar to service tax on buildings under construction, value-added tax is paid, but only in certain states including apartments in Noida, Chennai, and Kolkata 
  • Payable by the buyer 
  • Payable in the same way as the service tax
  • Charges vary between states % of agreement value in Mumbai & Pune, 5% in Bangalore 

TDS 

  • If you’re buying an expensive property, a certain amount of income will only then be deducted 
  • Payable by the buyer
  • Payable only on property transactions of over Rs.5 crore
  • 1% of the transaction value – the sale price before other taxes is deducted.
  • It’s deducted at the source, so the buyer takes the amount out of the purchase price and pays it directly to the income tax department.
  • When filing your tax return, ensure considering TDS: it should be taken off your tax bill, and you may even be eligible for a refund.

Capital Gains tax

  • Making a profit by selling your house? If yes, then you’re bound to pay this tax
  • Payable by the seller
  • Calculated by taking the price of the sales and by subtracting the price the house was initially bought for including the cost of improvements
  • If you own the property for more than 2 years, the buying and improvement costs are calculated according to officially indexed estimates for inflation. The initial expenses are unadjusted for short-term capital gains.
  • Short-term capital gains are taxed at 15%, plus some extra fees.
  • Long-term capital gains are taxed at 20%, plus some extra fees.
  • You could be eligible for an exception if you invest a long-term capital gain in another property.
  • Also, you might be able to exclude some of the gains if you sold the house due to- Job relocation, medical or health reasons, or an unforeseen circumstance such as death, divorce, or a natural disaster

Maintenance taxes

Maintenance tax is just one of many obligatory taxes that are concerned with property ownership for which as the property owner, you will be liable to pay every year. Further categorized into

House tax

 It is collected and used by the local authorities on basic services like roads and lighting. Since it’s a local tax, the cost varies from one city to another. Major factors influencing the valuation of this tax are-

  • Location
  • Type (Residential/Commercial/Land)
  • Property owner age
  • Property size
  • Occupied by the owner or rented out

Rental Income tax

  • If you have more than one property, there’s a rental tax to pay on those properties you don’t live in because legally you are obliged you occupy one residence
  • Payable even if you don’t rent out your second home
  • The valuation is determined based on an actual rental value of the property or the official rental value, whichever is greater
  • That value can be reduced by 30% to factor in charges for repairs and rent collection.
  • You can also deduct loan repayments if they’ve been used for the property, and you can deduct property tax payments too.
  • Charged as part of income tax, the rate varies depending on various criteria.

Exemptions on property tax

While the laws for property tax vary between states in India, certain categories of property owners earn reimbursements for their overall liability for property tax.

To cut down on expenses caused by property tax, you need to consider the exemption policy provided to-

  • Senior citizens
  • People with disabilities
  • Former military, navy, or any other personnel employed by defense services  
  • Indian Army Families of Martyrs, BSF, the police, the Fire Brigade and CRPF
  • Institutes of Education
  • Agricultural properties
  • Properties belonging to religious groups or governments are not liable to pay property taxes.

Overview on types of property

Government tax varies based on certain criteria for properties. Below listed are the various property division in India-

  • Land- If you have a land irrespective of whether or not any construction or improvements are done, you are tax payable
  • Improvements- Constructed a building or a storage space? If yes, then you are liable to pay as any improvements made on the land including immovable man-made creations is included under property tax
  • Personal Property- Cars, bases, and cranes fall under property tax. Basically, for using any movable man-made objects, you are payable to the government
  • Intangible Property- Ownership of untouchable objects like patents and royalties are included in intangible property

How to pay property tax?

Offline Payment

To pay your property tax, you can visit the municipal corporation office of your area or at the designated banks in affiliation with the municipal corporation. For property identification, you will have to provide the property tax number or khata number.

Online Payment

Let’s just thank the internet for making life simpler by opening doors to new opportunities

Gone are the days when paying property tax was considered a huge hassle. Now, as you know, with the evolution of technology everything is and can be done just at the fingertips. You now have options to pay property tax online.

The majority of the municipal corporations now offer paying property tax options, streamlining the process and saving your valuable time and energy.

To proceed with paying property tax online, follow-

Step 1- Log in to the official website of their municipality/city corporation.

Step 2 – Choose the tab indicating property tax and navigate to the payment option.

Step 3 – Choose the right form, based on the category under which an individual’s property falls. These forms are used to determine if any changes have been made 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 an option to clear backlogs in property tax payments.

Step 5 – Individuals will then be required to fill in their property identification number and any other relevant document on their property (zone under which it falls, property type, etc.) including the owner’s name.

Step 6 – Once all relevant information has been entered, individuals can choose the mode of payment, which could be credit/debit cards or internet banking.

Step 7 – Once payment is made individuals can take a printout of the challan for their reference.

Different Methods of Calculating Property Tax

Since you are the one liable for paying the tax, haven’t you ever been curious about on what basis is property tax being calculated? How are you ending up paying so much as a tax? Well, it’s good to be curious, because it is your right to learn about the same.

Different cities in India follow different methods to calculate property tax. Continue reading to know about the various methods used for the calculation of property tax

Capital Value System (CVS)

 If you own a property in Mumbai, then your property tax will be decided by the government depending upon the locality of the property. The more lavish area your land is located in, the higher property tax you will end up paying for. Therefore, under CVS, the property tax will be calculated as a percentage of the market value of the property

Unit Area Value System (UAS)

 Various cities like Patna, Bengaluru, Hyderabad, Kolkata, and Delhi follow UAS i.e., in these cities, the property tax will be charged based on the expected returns which include location, usage, and land price of the property which will further be multiplied with the built-up area of the property to derive the tax valuation.

Annual Rental Value System/Rateable Value System

 Chennai and certain areas of Hyderabad follow this method where the tax for your property will be calculated based on the rental value derived from the property in a year. And by rental value, I do not mean that it is supposed to be the rent amount received only. The municipal corporations will be doing the valuation of the rent based on the location, size, and condition of the property. The authorities will also take landmarks and other relevant amenities at the valuation time.

Purpose of Property Taxes

Being one of the major sources of income for our country, the government bodies utilize the money accumulated under property tax for various needs throughout the area which includes construction, city amenities, emergency services, maintenance of schools, and much more and you are contributing towards the community services and infrastructure which eventually increases the value of your home by creating a valuable community

Importance of Property Tax

In the case of a land dispute, receipt of property tax plays a vital role in demonstrating possession of property.

You may be asked to include paperwork to confirm possession of the land when registering the property in your name in the relevant municipal records. The list of documentation that you will need to provide, to prove the ownership of the property is a copy of the sale deed, clearance from the society, duly filled application, photo and address verification, a copy of the receipt of the last paying property tax, etc. Receipt of property tax is also a vital record for availing of loans, such as loans against property.

Property Tax Deductions against Income

Under Section 24, “Deductions from Income from House Property” is applicable in the following circumstances-

  • If you own only 1 house and you live in it, the income from the home would be counted as Zero.
  • If you rent out your house(s), the rent you have received will be considered as part of your income.
  • If you have more than 1 home, the net annual worth of the house, excluding the house in which you live, would be considered your income.

Property Tax Deductions under Section 24

If you own property in India, you will be eligible for two kinds of deductions under Section 24 of the Income Tax Act. They are:

Standard Deduction

 If you are a taxpayer, you can enjoy an exemption when the income you receive from your house or house is 30% of the Net Annual Value. In that case, this income is not taxable. However, this is not applicable when you reside in the house that you own.

Interest on loan

 If you have taken a home loan for purchase, construction, or renovation of the house, whatever interest you pay on the principal amount of the loan is exempted from tax payment. The sub-clauses in this category are:

  • Exemption for loans taken for a house that is occupied by you is of up to INR 2 lakh. 
  • Even if you have opted for a loan for buying or constructing a house before purchasing it or completing its construction, you will be able to avail exemptions. However, in such a case, you have to seek exemptions on the interest paid on the principal amount before your purchase or completion of construction. You will be eligible for deductions in 5 equal installments. This clause does not apply to the renovation or reconstruction of a house.
  • If you have opted for a loan for reconstruction or renovation, you will not be able to avail of tax exemptions till the completion of the renovation or reconstruction.

Property Tax Exemptions under Section 24

  • If you do not reside in the house for which you have taken a loan, you will be eligible for exemption on your entire interest. There is no upper limit for the exemption.
  • If you do not reside in the house for which you have taken a loan because you stay in another city as a result of your occupation or business, or you occupy another property you own or have rented in the same city where you are employed, you are eligible to claim an exemption on your interest of no more than INR 2 lakh.
  • The purchase or construction of the house has to be completed within 3 years of opting for the loan for you to be able to claim the maximum deduction of INR 2 lakh on the interest amount. In case the purchase or construction of the house takes more than 3 years to get completed, you will only be eligible for a deduction of INR 30,000 on your interest amount.
  • Brokerage or commission services that help in arranging loans and tenants do not attract deductions.
  • You should ask for an interest certificate for the loan that you have opted for so that you can submit it as proof for the verification process during the calculation of tax deductions.

Deduction under Section 80C

  • For a new house, you can claim deductions under section 80c of the Income Tax Act. Under this clause, deductions can be claimed for stamp duty and registration charges, which could add up to around 10% of the total cost of a house. Deductions claimed under this section are subject to the condition that they do not exceed Rs 1.5 lakh.
  • You can also claim a deduction towards any other expense during the process of transfer of property. Homeowners should keep in mind that this is applicable only for new residential properties.

Delay in payment of property tax

I strongly suggest you add a reminder for the tax clearance deadlines or else you will only end up regretting as late payments towards property tax will make you pay a hefty sum of penalty (based on a certain percentage of the amount due) which is similar to ripping off money which otherwise could be saved and used rightfully.

The interest rate varies from one state to another, starting from 5% to 20% depending on their respective policies. You might even lose out on your property as the authorities could even be required to attach and auction your property to recover losses due to a lengthy delay in tax payment.

However, in certain cases, various states and municipal communities tend to waive the property tax interest rate.

To conclude

When you have a good understanding of property taxes, the only way to guarantee you pay the correct amount is by educating yourself. Stay up to date with your municipalities changing rates and spending from year to year, finding out about any deductions you might be eligible for, and having an active role in the valuation of your property.

Frequently Asked Questions

  1. My house owner says I as a tenant should pay the property tax. Is that legal?

No. In India, the house owner has to pay the tax. If your house owner is forcing you to pay this amount, then you can sue him in civil court.

  1. Why is my property tax assessment higher than the value of my property?

Either you are not aware of the market value of your property, or your assessment is wrong. It is best to approach your local administration and clarify. The tax bill will also give you a clue on why the tax amount is high.

  1. How many times is the property tax paid?

A property tax is an annual charge paid by the property owner to the concerned authority. The amount of property tax that is to be paid by the property owners varies from one State to another and is also based on factors like location, unit area coverage, and type of property.

  1. Do I have to pay property tax on agricultural land?

Agricultural land is free from property tax payment liability in India.