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Property Tax – Definition, Types and Calculations

by | May 2, 2024 | Income Tax | 0 comments

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Important Keyword: Income from House Property, Property Tax.

Property Tax – Definition, Types and Calculations

In India, property tax serves as a significant revenue stream for municipal authorities at the city level. This tax is imposed on real estate properties and is calculated based on various factors such as the property’s area, construction, size, and value.

Municipal authorities assess the property tax by considering factors such as the location and amenities available in the vicinity. The tax rate may vary from one locality to another and is often determined by the municipal corporation or council.

Property tax plays a crucial role in funding essential services and infrastructure development within cities. Revenue generated from property tax is utilized for maintaining roads, providing sanitation services, ensuring clean water supply, and other civic amenities.

Property owners are required to pay the assessed property tax to the municipal authorities within a specified timeframe. Failure to do so may result in penalties or legal actions by the municipal corporation.

What is a Property Tax?

In the realm of taxation, the term “property” encompasses all tangible real estate assets owned by an individual. This includes not only residential structures like houses but also commercial properties such as office buildings and premises rented out to third parties.

Property tax, therefore, is an annual levy imposed on land and property owners by local government bodies or municipal corporations. The funds collected through this tax serve a crucial purpose: they are utilized for the maintenance and upkeep of public infrastructure and amenities. These may include essential facilities such as roads, sewage systems, parks, government buildings, and other communal spaces.

Property tax acts as a vital source of revenue for local governing bodies, enabling them to finance various public services and infrastructure projects that benefit the community at large. By ensuring the regular payment of property tax, property owners contribute directly to the development and maintenance of their local area, thereby fostering a better living environment for all residents.

What are the Types of Property?

In India, properties are broadly categorized into four main types:

  1. Land: This is the most prevalent type of property owned by citizens. Land refers specifically to the core land without any construction or improvement. It forms the foundation upon which other types of properties are built or developed.
  2. Improvements made to the land: This category encompasses enhancements or developments made on the land itself. It includes constructions like buildings, warehouses, or any other structures erected on the land. These improvements enhance the utility or value of the land.
  3. Personal property: Personal property comprises movable assets that individuals own. This category includes vehicles such as cars, buses, cranes, or trucks, which can be transported from one location to another. Unlike land and improvements, personal property can be easily moved or transferred.
  4. Intangible property: Intangible property refers to assets that do not have a physical form but hold value. This includes ownership rights to intellectual property such as patents, trademarks, copyrights, and royalties. While intangible, these assets can be bought, sold, licensed, or transferred like tangible properties.

How is Property Tax Calculated?

Property tax calculation in India takes into account various factors, with methods differing between municipal corporations. However, the fundamental computation remains consistent.

Initially, property assessment involves determining:

  • Location and Amenities: The area, amenities available, and status of occupancy influence assessment.
  • Property Type: Whether residential, commercial, or land.
  • Construction Details: Year and type of construction, such as multi-storied or single floor, pukka or kutcha structure.
  • Floor Space Index and Carpeted Area: These factors determine usable space within the property.

After assessing these parameters, municipal corporations utilize one of the following methods:

  1. Annual Rental Value System (RVS) or Rateable Value System: Tax is based on the yearly rental value of the property, determined by municipal authorities considering factors like size, condition, location, and amenities. This value may not necessarily reflect actual rent collected. Hyderabad and Chennai municipalities employ this method.
  2. Capital Value System (CVS): Tax is calculated as a percentage of the property’s market value, determined by the government based on location. The market value is published and revised annually. Mumbai’s municipal corporation follows this method.
  3. Unit Area Value System (UAS): Tax is calculated based on the per-unit price of the property’s built-up area. This price considers location, land price, and usage. The final tax value is obtained by multiplying the per-unit price with the built-up area. Municipal authorities in cities like Kolkata, Delhi, Bengaluru, Patna, and Hyderabad use this method.

How to pay Property Tax Online?

To pay property tax online through the official website of the Municipal Corporation, follow these steps:

  1. Visit the official website of the concerned municipal corporation.
  2. Navigate to the “Online Services” section and select “Pay Property Tax.”
  3. Choose the option to proceed with paying property tax and move to the payment options.
  4. Fill out the appropriate property tax form, which could be form 4 or 5, depending on the property type and category.
  5. Ensure to select the correct assessment year, representing the year for which the tax is being calculated and paid.
  6. Enter the Property Identification Number (PID) and provide other necessary information, such as the owner’s name and property documents.
  7. Select the preferred mode of payment from the available options.
  8. After entering all relevant details and completing the payment process, a challan will be generated on the screen.
  9. Print out the generated challan for future reference and record-keeping purposes.

How to Calculate Income from House Property?

When computing Income from House Property, several key points need consideration:

  1. Net Annual Value Calculation: The net annual value of a residential property is determined by subtracting municipal taxes from the gross annual value. This provides an accurate reflection of the property’s income-generating potential after accounting for taxes.
  2. Partial Occupancy: If a house remains vacant for any duration during a financial year, rental income should only be considered for the period the house was occupied, not for the entire 12 months. This ensures that income calculations accurately reflect the property’s actual rental earnings.
  3. Offset Vacancy Loss: In cases where a property remains vacant while property tax is still paid, the owner can offset this loss against income from other sources within the same fiscal year. Alternatively, if the loss cannot be offset in the same year, it can be carried forward for up to 8 years. This provision helps mitigate financial losses incurred due to property vacancy.
Income Tax Deductions on Income from House Property

Tax deductions can significantly reduce the tax liability on income from house property, with two main avenues available under sections 24 and 80C of the Income Tax Act:

Deductions under Section 24:

  1. Standard Deduction: Property owners can claim a standard deduction equivalent to 30% of the net annual value. This deduction reduces the taxable income from house property.
  2. Interest on Loan: Interest paid on loans taken for the purchase, construction, or renovation of a house is eligible for tax exemption. For self-occupied properties, individuals can claim an exemption of up to INR 2,00,000 on the interest paid. If the loan is taken before the completion of construction or purchase, interest paid during this period can be claimed in five equal installments starting from the year of purchase or construction completion. However, for renovation or reconstruction loans, exemption can only be claimed after completion of the renovation or reconstruction.

Deductions under Section 80C:

Under Section 80C, individuals can claim a deduction of up to INR 150,000 on stamp duty and registration charges incurred while purchasing a new house. Additionally, expenses related to the transfer of property can also be claimed for deduction.

These deductions provide significant relief to taxpayers, reducing their overall tax burden and promoting investments in housing. By taking advantage of these provisions, individuals can optimize their tax planning strategies and maximize their savings.

Read More: Taxability of Composite Rent, Unrealised Rent, and Arrears of Rent

Web Stories: Taxability of Composite Rent, Unrealised Rent, and Arrears of Rent

Official Income Tax Return filing website: https://incometaxindia.gov.in/

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