Property Tax: What is Property Tax and How It Is Calculated?

Property Tax

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Property tax or house tax is the amount of money paid by the property owners to the municipal corporation or the local government of the area where the property is located. By property, it means all tangible real estate property, an individual’s house, or office building that the owner has rented to someone else.

The government collects the amount of property tax and uses it for the maintenance or repair of various public facilities such as roads, parks, schools, sewage systems, etc.

Types of Property Tax

The Indian government divides properties into four categories to simplify tax calculation. Here are the four types of property tax in India:

  1. Land: The land should be in its most basic form without any construction work.
  2. Improvements made to the land: Man-made immobile land constructions such as godowns and buildings.
  3. Personal property: Man-made vehicles like cars, trucks, buses, bicycles, etc. 
  4. Intangible Property: Properties that are untouchable i.e. royalties and patents.

How to Calculate Property Tax?

The municipal authorities calculate property tax in proportion to the assessed value of the property. Furthermore, there are three ways to calculate property tax:

 1. CVS (Capital Value System)

Based on its location, the local government sets a percentage of the property’s market value as the property tax. Mumbai is currently using this system.

2. UAS (Unit Area Value System)

The price per square foot of your property determines the amount of property tax you pay. The expected returns from the property, which depend on its location, use, and land price, determine the price accordingly. New Delhi, Bihar, Kolkata, Bengaluru, as well as Hyderabad, among other places, currently use this system.

3. RVs, also known as the Annual Rental Value System or the Rateable Value System

The municipality determines the price for this type of property tax calculation based on a property’s derived rental value. They consider the location, size, amenities, and so on. Chennai and parts of Hyderabad use this system.

Variables that affect the calculation of property tax are:

  • The location
  • Size of the property
  • Property situation (under construction or ready to possess)
  • The owner’s gender (female property owners may get a concession)
  • Owner’s age (Senior citizens may get to enjoy discounts on property tax)
  • Variety of civic services/facilities provided by local municipal governments
  • After accounting for all variables, the following formula is used by local municipal bodies to calculate property tax:
  • Property tax = built-up area x age factor x building type x category of use x floor factor

How to Pay Property Tax Online?

The internet has had a significant impact on how the world operates, opening new doors and making lives easier. The nightmare of property tax payments is over with the convenience of online platforms. In fact, you can now pay your property tax online according to your convenience. In general, most municipalities allow you to pay your property taxes online, which simplifies the process and saves you time.

How to Pay Your Property Tax Online?

  • Go to the municipality’s/city corporation’s official website.
  • Navigate to the payment option by selecting the property tax tab.
  • Select the appropriate form (either 4 or 5) based on the category of an individual’s property. These forms actively determine the presence or absence of changes to the property under consideration.
  • Select the assessment year. This is the fiscal year in which property taxes must be calculated and paid. Most corporations offer a way to pay off backlogs in property tax payments.
  • Individuals must then enter their property identification number and any other relevant documents about their property (zone under which it falls, property type, etc.), including the owner’s name.
  • After entering all relevant information, individuals can select the mode of payment, which could be credit/debit cards or internet banking.
  • After making payment, individuals can take a printout of the challan for their records.

Interest in Property Tax

Late payments on property taxes may result in a fine equal to a percentage of the amount owed. This interest varies by state, with some states waiving it and others charging rates ranging from 5% to 20%, depending on their individual policies.

Deductions for Income from Real Estate

Section 24 is titled “Deductions from income from residential property.” The term ‘income from house property’ applies in the following situations:

  • If you rent out your house(s), the rent you receive will be counted as part of your income.
  • The Net Annual Value of the homes other than the one in which you live will be considered your income if you own more than one home.
  • Your income from house property is considered NIL if you inherit only one house. After Section 24 deductions, any income derived from rent and the annual value of additional houses will be subject to tax.

Section 24 Tax Deductions

Section 24 of the Income Tax Act provides for two types of deductions:

Standard deduction: This is an exemption available to all taxpayers in which a sum equal to 30% of net annual value does not exceed the tax limit. This does not apply if you are the sole owner of your home.

Loan interest: If you have a home loan for the purchase, construction, or renovation of a home, any interest you pay on the principal amount of the loan is exempt from taxation. This category’s sub-clauses are as follows:

You can claim exemptions of up to Rs.2 lakh if the loan is for a self-occupied property.

  • Demand the interest if you took a loan for the purchase or construction (not renovation) of a property before actually buying or completing its construction.
  • Plea for the deductions for interest paid before the construction or purchase is completed in 5 equal installments beginning in the year the house is purchased or the construction is completed.
  • If the loan is used to renovate or rebuild a home, you cannot claim tax relief until the renovation is completed.

To claim this deduction, you must calculate the interest you must pay to the bank or financial institution from which you obtained the loan, in addition to the principal repayment. You can get an exemption for the entire annual interest amount, regardless of whether you have actually paid the amount to the financier.

Exceptions in Accordance with Section 24

  • If you do not live in the house, you can claim an exemption for the entire amount of interest paid, with no upper limit.
  • If you do not live in the house because you work or live in another town, or if you live in another property or rented property in the city where you work, you can claim tax exemption on interest payments only up to Rs.2 lakh.
  • No brokerage or commission for arranging the loan or tenant is deducted.
  • To claim the maximum deduction on the loan interest amount, you must purchase or complete the construction of the house within three years of taking out the loan. If the construction or purchase is not completed within three years, you can claim only Rs.30,000 rather than Rs.2 lakh.
  • You must have an interest certificate for the loan you are taking out.

Section 80C Tax Deduction

Individuals who buy a new house can deduct the cost under section 80C of the Income Tax Act, which could amount to around 10% of the total cost of a house. Deductions claimed under this section are subject to a limit of Rs 1.5 lakh.

Individuals can also claim a deduction for any other expenses incurred during the property transfer process. Homeowners should be aware that this only applies to new residential properties.

Property Capital Gains Tax:

Capital gains tax is the tax levied on the profit made from the sale of a property. As a result, capital gains tax, if not handled properly, can be a significant source of wealth loss. A simple solution is to use the proceeds from a property sale to purchase a new home; however, such property must be purchased within two years of the selling date. It can also be used to construct a home, thereby lowering the amount of capital gains tax on property.

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Also read:

Tax Benefit on Home Loan

Top Up Loan Tax Benefit

Tax Benefits on Second Home Loan

Section 24 of Income Tax Act: Check Deduction for Home Owners

How Stamp Duty and Registration Charges are Calculated on Property?

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