What is Property Tax?

Understanding how property taxes are calculated is often one of the most confusing challenges for homeowners. This is a tax, which is charged by the local government on real estate including land owned by you. The value of property forms the basis of this tax. Many local governments calculate the property or house tax not only based on the size of the property but its location, occupancy status, covered area and quality of construction.

As it has been a vital part of Indian taxation system, no city or village is exempted from paying it. Farmers, peasants, and landowners in remote villages are also liable to pay this amount to the local authority, in absence of which a penalty is imposed and be confiscated if the owner kept defaulting over a long period. The money generated through this tax is used by the government to maintain the infrastructure and for purposes like repairing of roads, snow removal, building schools etc.

Property tax is not always identical; it is different in different states. It is further delegated to the municipalities by law, which results in various property taxation ways between different municipalities within the states. To maintain the public services properly, this power is given to the local bodies however; the liability to pay tax is with the owner of the property.

How is Property Tax Calculated?

Property Tax in India is mainly calculated in three factors.

Annual Rental Value or Rate-able Value or ARV : ARV is a system in which the gross annual rent of the property is fixed by the municipal body and taxes would be levied based on the estimated value. The rateable value may depend on: Size of the property Location Proximity of the property to certain landmarks, locality Condition of the premises, amenities provided.

For example For Calculating Property Tax in Chennai is the first thing to do is to arrive at the annual value of the property. This can be done by calculating the monthly rental value.

Monthly rental value = Plinth Area x Basic Rate per sq ft
Annual rental value = Monthly rental value x 12 – 10%.
NOTE: Delhi follow the Annual Rental System

Capital Value System or CVS : CVS is where the market value of the property would be used to estimate the taxes to be paid. Generally, this market value is fixed by the stamp duty department of the area. Mumbai follow this system.

Here’s the formula used by Brihanmumbai Municipal Corporation-

Property tax = base value × built-up area × Age factor × type of building × category of use × floor factor

Generally, you need to ascertain the value of property fixed for your zone and multiply it with the carpet area of your house.

Unit Area System or UAS: The Unit Area Value is based on the expected returns from the property depending on the location and usage of the property. Since the unit of calculation is based on per square foot per month (UNIT) and for a particular location, street, (AREA) and multiplied by a rate (VALUE).

In New Delhi, Bangalore, Kolkata, Hyderabad, Patna and Ahmedabad property tax is calculated by fixing a price for per unit value of the area.

The Municipal Corporation of Delhi has developed an online calculator to evaluate property tax on the basis of the type of location, type of construction and amenities available around. It also factors in the annual value of the property which is derived through following formula-

Annual Value = Covered Area x Unit Area Value x Age Factor x Use Factor x Structure Factor x Occupancy Factor

However, Delhi government has given a rebate to certain classes of citizens like senior citizens, women, physically challenged, ex-serviceman, group housing flat owners and CGHS Flat owners. This rebate is as high as 30 per cent of the property tax.

As Property Tax serves to be the major source of revenue generation of urban local bodies and municipalities in order to keep intact the basic civic services in the city, it is our prime responsibility to pay this tax with full honesty.