What is Property Tax / House Tax in India?
Municipalities across all cities in India charge a levy from local residents to maintain the city’s infrastructure such as sewerage, park, roads, other civic amenities, lighting, etc. The property tax shall not be confused with income tax payable on income generated from the property. While income generated from the property by renting it out comes under the ambit of income tax authorities and is calculated as per the income tax guidelines, the property tax is a municipal level subject. Income generated from the property is a central subject whereas property tax is a local subject. Property tax is also sometimes referred to as ‘house tax’.
Some municipalities do not charge property tax and instead bill separately for the services rendered to the residents. There are municipal bodies who charge residents for water and drainage facilities, maintenance charges. Moreover, MLA (Member of Legislative Assembly) and MP (Member of Parliament) funds are also utilized for the upkeep of the city.
How is property tax calculated? The tax is computed on the basis of rental income that the property under consideration may generate by way of letting it out. Usually, the property tax or house tax is a small percentage of the yearly rental income that the property can generate if it is rented-out. And it varies from state to state and from city to city. The property tax / house tax in India is to be paid once every year or every 6 months.
Property Tax or House Tax in India
Property tax is a levy charged by the municipal authorities for the upkeep of basic civic services and amenities in the city like roads, sewer system, parks, and other infrastructure facilities like lighting, etc., as well as for maintenance of the existing infrastructure. Generally, property tax is levied on the basis of reasonable rent at which the property might be let from year-to-year. The reasonable rent can be actual rent if it is found to be fair and reasonable. In the case of un-let properties, the rental value is to be estimated on the basis of letting rates in the locality.
Features of Property Tax in India
Immovable Property consists of land and the improvement made to land. The property tax is designated as “Taxes on lands and buildings”.
In India, the owners of property are liable for the payment of municipal taxes unlike the United
Kingdom, where the occupier is liable. However, in cases where the owners fail to pay the taxes, the occupant is required to pay the same so as to avoid the property being put on auction by the local body for recovery of arrears of property taxes.
Property tax is not to be confused with Income Tax payable on income from house property under the
Income Tax Act, 1961, and amendments thereto. These are two different forms of taxation. Property Tax is levied by the local body like Panchayat/Municipality/Municipal Corporation while the Income Tax is levied by the Central Government. The method of computation of amount of tax payable in both the cases is very different.
In India, property tax is levied on real estate which consists of buildings or land attached to the buildings. Vacant plots of land without any adjoining building are not liable to be taxed under this head. It will rather be taxed as income from other sources. Following are the kinds of properties that are liable to be taxed under property tax in India:
- Residential house (self-occupied or let out)
- Office Building
- Factory Building
Property tax in India is paid on annual or semi-annual basis (year ending basis 31st March).
In addition to Property Tax, the local bodies may also levy following other taxes which relates to the same property:
- Water and drainage tax
- Lighting tax
- Scavenging tax
These taxes are collected at a specified percentage of the property tax by some of the Local Bodies. For instance, the Mumbai Municipal Corporation levies service charges as a percentage of Property Tax.
These charges have registered a steady increase; sometimes making the current effective tax rate 225 per cent for non-residential premises and 105 per cent for residential premises depending on whether water meter is connected or not. In Bangalore, the corporation levies 34 per cent Cess on Property Tax and collects it on behalf of Government. The property tax and other taxes levied by Municipal Authorities in many cities in India are normally equivalent to three to six months’ rent in case of commercial property.
Provisions in respect of the rate structure of property taxes vary significantly between states and among cities within states. The State Governments prescribe the minimum and maximum tax rates which the Municipalities can levy on properties. There are six different ways in which rate structures are prescribed: a consolidated rate which includes imposts on the same tax rate; statutory specification of the maximum and minimum rate; progressivity in rate structure; and discrimination in rate structure according to use, location, etc. In addition, there are area specific values in cities where unit area systems are in place for estimating the ARVs, and rates of taxing the capital values where capital valuation is in use.
Article 285 of the Constitution exempts properties of the Union Government from payment of property taxes. Exempted properties in India constitute approximately 10 per cent of the total urban properties and about 11 per cent of the assessed properties.
There are three main ways in which Property Tax is calculated:
- ARV- Annual Rental Value or Rate-able Value
- CVS- Capital Value System
- UAS- Unit Area System
Annual Rental Value or Rate-able Value of a property is the gross annual rent at which the buildings or and may reasonably be expected to let from month-to-month or from year-to-year. The ‘reasonable rent’ can be ‘actual rent’ if it is found to be fair and reasonable. If the declared annual rent is not found to be reasonable, the annual rental value will be estimated. In the case of non-rented properties, the rental value is to be estimated on the basis of rents prevailing for similar properties in the same locality.
A city is divided into wards and the basic annual rental values as well as the applicable property tax rates are decided by the Municipal Authority for each ward. Rates of property tax will also depend upon the usage i.e., residential or commercial or industrial and whether it is owner-occupied or leased.
Mumbai was following the Annual Rental Value method and it is only in March 2009 that the State
Legislative Council approved the bill to calculate property tax on Capital Value System instead of the rate-able value-based system. The capital value-based system of collecting property tax levies a percentage of tax on the market value of the property as prescribed by the Stamp Duty department.
In New Delhi, Bangalore, Kolkata, Hyderabad, Patna and Ahmadabad property tax is calculated by fixing a price for per unit value of the carpet area (Unit Area System). Patna was the first to introduce this system.
In New Delhi, the unit-based system of collecting property tax was implemented in 2004. This system is transparent and easy to calculate. The tax for each zone of the city is fixed and the assessee has to merely multiply the ‘zonal value’ with the carpet area of his property. Again, different weight-age in diminishing order are given to a property based on whether it is wholly rented, partly rented, or entirely for the landlord’s self-use, age of construction, etc.
There are areas that have already been developed up to or close to the shoreline – For this purpose, developed area is referred to as that area within the municipal limits or in other legally designated urban area which is already substantially built up and which has been provided with drainage and approach roads and other infrastructure facilities, such as water supply and sewerage mains.
Some development on the landward side of existing road and structures and proposed road shown on the coastal zone management plan are permissible in this zone.
Provision for Appeal
All Municipal Acts have made a provision for appeal against the assessment mostly to a Committee or a specified authority. The next level of appeal is the District Judge, who is the final fact finding authority.
There are differences amongst States in the constitution of appeal committees/authorities and subsequent appeals before the Civil Courts. In the case of Property Tax, the assessor determines the assessable value of the property. The appeal process gives taxpayers the opportunity to challenge the assessable value, on the grounds of reasonableness, if they so wish.
Property Tax Reforms
Many Municipalities have undertaken Property Tax reforms – the immediate incentive being funds under the Jawaharlal Nehru National Urban Reforms Mission (JNNURM). JNNURM outlines a set of ‘mandatory’ and ‘optional’ reforms at the state and local level for fast track planned development of identified cities.
The focus is on efficiency in urban infrastructure and service delivery mechanisms, community participation and accountability of Urban Local Bodies/agencies towards citizens.
With respect to Property Tax, the reforms have focused on:
- Need for more accurate property inventories and record management (among others through
- Computerizing property tax records and physical surveys);
- Adopting new approaches such as self-assessments to simplify property tax assessments and make it more transparent; improving taxpayers understanding of the assessment process;
- Improving collection methods, for example through e-governance.
This has resulted in Municipalities computerizing land and building records and making provision of payment of property tax online. Online property tax calculators are available on the websites of Municipalities. In fact, the Pune Municipal Corporation has initiated an SMS facility to check the owners’ property tax dues.
As part of the reform process, some Municipalities have introduced the scheme of self-declaration of Property Tax, thereby making Property Tax assessment return based and automatically acceptable except for a percentage of cases selected for random scrutiny. However, the predominant practice prevalent in the country continues to be one where the assessment is made by the assessor.
What is Property Tax / House Tax in India?
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