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Real Estate Tax | Commercial Real Estate

Complete Guide for Paying Real Estate Taxes in India

complete-guide-for-paying-real-estate-taxes-in-india
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February 20, 2023
Market of India

Introduction

What is a Property Tax?

Property tax is a tax imposed by the local government on real estate properties, such as land and buildings, based on the property’s value. Property tax helps to fund local services such as schools, roads, and emergency services. The amount of property tax a person pays gets ascertained by the value of their property and the local tax rate.

Several government bodies and municipal corporations levy property taxes on several assets under their supervision: buildings and tangible areas. Property tax is usually an ongoing obligation assessed annually and must be paid regularly to the local government. If the property owner fails to pay their property tax, they may face penalties such as late fees or even the eventual seizure of their property.

In some cases, the property tax may be deductible on federal income tax returns, which can provide some relief for property owners.

Did you know?

For the financial year 2022, the total value of taxes on income and property in India would exceed 13 trillion Indian rupees. In the financial year 2020, over 12 trillion Indian rupees were recorded as the amount collected from taxes on income and property in the country.

Why do we have to Pay Property Tax?

In a nutshell, the primary concept of property tax is to garner revenue, enhance the maintenance services performed by the local bodies, and improve the funding for cleanliness, water supply and other civic amenities. It is typically based on the estimated market value of the property. In addition, it funds various local public services and infrastructure, such as schools, roads, public safety, and other government services.

Purpose and Concept of Property Tax

The purpose of property tax is to fund various public services such as schools, police and fire departments, and infrastructure improvements. The concept of property tax relies on the idea that property ownership carries certain privileges and responsibilities, including the obligation to contribute to the cost of the services that support and maintain the community. The amount of property tax owed by the owner is by multiplying the property’s taxable value by the tax rate set by the government.

1. What are the Different Types of Property Taxes in India?

  • Land and Building Tax: Levied on land ownership and buildings in urban areas. The amount of tax is determined based on the property’s location, size, and usage.
  • House Tax: Levied on the ownership of residential buildings. The amount of tax is determined based on the size and value of the property.
  • Property Tax: Levied on the ownership of both residential and commercial properties. The amount of tax is determined based on the property’s location, size, and value.
  • Agricultural Income Tax: Levied on individuals who earn an income from agricultural activities such as farming, fishing, and forestry. The amount of tax is determined based on the individual’s agricultural income.

It’s important to note that the specific property taxes and the amount levied may vary by state and local government in India.

Case Study

 The RBI report highlights significant disparities in the collection of property taxes across various states

According to the recent RBI report on the financial status of municipal bodies in India, Delhi, Gujarat, Maharashtra, Chandigarh,    and Chattisgarh have higher tax collections than other states.

Report Highlights of Property Tax Revenue

  • Delhi: Rs 2,940 crore
  • Gujarat: Rs 1,548.69 crore
  • Uttar Pradesh Rs 936.77 crore
  • Rajasthan: Rs 343.98 crore

Despite being a dominant source of municipal revenue in India, property tax collection still needs to be higher than that of the Organisation for Economic Cooperation and Development (OECD) countries.

Factors Causing Lack of Property Tax Enforcement Mechanisms

● Outdated exemptions
● Property undervaluation
● Inadequate policies
● Incomplete property registries
● Lack of institutional capacity
● Outdated property databases and rolls
● Suboptimal tax rates have led to significant under-collection in most Indian cities.

However, with the expansion of tax base administration and increased efficiency of operations management, several state governments have significantly garnered the data and streamlined the property tax collection procedure.

2. Who Imposes Property Tax in India?

In India, local government bodies such as Municipal Corporations, Municipal Councils, and Nagar Panchayats impose a property tax. These local bodies are responsible for assessing the value of properties within their jurisdiction and levying a tax based on the property’s value. The amount of tax imposed varies depending on the location, property type, and other factors. The local bodies use the collected tax revenue to provide essential services. It includes road maintenance, sanitation, water supply, and public lighting.

3. How is Property Tax Calculated?

There are three ways to determine how the municipal authorities and local corporations calculate the property tax:

1. Capital value system

The property tax system determines the value of each piece of land. An expert assessor evaluates the land based on factors such as the improvements made to it, its shape, and the benefits it receives from the local area. The size of the land determines the amount of tax owed, and it is calculated based on the property’s current value, which is determined by the local department responsible for collecting taxes. In short, the more valuable a property is, the more property tax it will have to pay.

2. Unit area system

The tax valuation of a property is by multiplying its built-up area with a per unit price, based on factors such as location, usage, and land price. The price derived is from the expected returns from the property.

  • The locality of the property
  • Civic operations or facilities
  • Occupancy status

3. Annual rental value

The government or municipal authorities determine the yearly rental value of a property, which is the basis for tax calculation.

4. Property Tax Calculation in Tamil Nadu

property-tax-calculation-in-tamilnadu

The Greater Chennai Corporation (GCC) calculates the annual rental value of a property using the Reasonable Letting Value (RLV) system:

  • Property’s plinth area
  • The introductory rate of the street
  • Usage of the building (residential or non-residential)
  • Nature of occupancy and the age of the building.
GCC-revenue-tax

Tamil Nadu’s tax revenue grows over 50% comparatively in the fiscal year

The provisional figures from the Comptroller and Auditor-General (CAG) show that Tamil Nadu’s tax revenue increased by 52.3% to ₹33,923.04 crores in April-June 2022, compared to ₹22,260.68 crore in the same period the previous year. Additionally, income from stamps and registration fees saw a significant increase of 92.6%, rising from ₹2,314.46 crores in the first quarter of fiscal 2022 to ₹4,457.95 crores in the first quarter of fiscal 2023.

1. What are the Exemptions Under Property Tax?

  • Senior Exemptions: Senior exemptions are property tax reductions for elderly homeowners. The eligibility criteria for senior exemptions vary by state, but generally, homeowners must be over a certain age (e.g. 65 or 70 years old) and meet certain income or net worth requirements.
  • Disabled Veteran Exemptions: They are provided property tax relief and have been honourably discharged from military service, and have a disability rating from the Department of Veterans Affairs (VA).
  • Other Common Exemptions: It is for nonprofit organisations, religious institutions, educational institutions and agricultural land.

2. How is Property Tax Better for Public Services?

Property taxes provide a stable and predictable source of revenue for local governments to fund essential public services such as schools, police, fire departments, and road maintenance. Since property taxes are based on the value of a property, as property values increase over time, the revenue generated for public services also increases. As a result, it helps to ensure that communities have the resources they need to maintain and improve public services for residents. Additionally, property taxes help to distribute the cost of public services fairly among residents, as those who own more valuable property contribute more to funding public services.

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Wrapping up: Understanding Real Estate Taxation

In conclusion, paying real estate taxes in India is a crucial aspect of property ownership. The taxes are determined based on the property’s current market value and are collected by the local government. Property owners are responsible for staying updated on tax laws and regulations and making timely payments to avoid penalties or legal consequences. It is recommended to seek the help of a professional or reach out to the local government for clarification on any questions. By following these guidelines and staying informed, one can ensure a smooth and hassle-free process of paying real estate taxes in India.

FAQs

1.How property tax is calculated in India?
In India, property tax is calculated based on the value of a property and the tax rate set by the local municipal corporation. The value of the property is determined by the local authorities and is often based on the market value of similar properties in the same area.
 
2.How do I pay taxes on the sale of the property?
In India, the tax on the sale of the property is known as Capital Gains Tax and is calculated based on the difference between the sale price of the property and the cost of acquisition of the property.
 
3.How much TDS is applicable to property sales?
According to Section 194 IA of the Income Tax Act of 1961, the purchaser of the property should deduct Tax @ 1% or 0.75% at the time of making payment of sale consideration for all transactions from June 1, 2013.

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