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What is the Process of Calculating Property Taxes?

by sharsparshika

Property tax, also known as house tax, is the amount a property owner must pay to the local government or their area’s municipal corporation. In India, municipal authorities levy property tax on real estate based on the property’s size, location, value, and construction type. The property tax rate and valuation methods vary between municipal authorities. But most of the time people don’t know how property tax is calculated, don’t worry go through once this article.

The owner of a tangible real estate property like an office, house, or building must pay the property tax annually. The amount that the government collects from property owners is used for repairing or maintaining infrastructural amenities in that particular region, including roads, parks, lighting, schools, sanitation, sewage system, etc. In this article, the reader will learn how property tax is calculated, along with other relevant information.

Understand the Property Types in India

To make property tax calculation easier, the Indian government has divided properties into four categories:

  • Land: Land is the property in its raw form without any improvisation or construction on it.
  • Land Improvements: These are immobile constructions on land, such as buildings and godowns.
  • Personal Properties: These are movable properties, like trucks, buses, cranes, and cars.
  • Intangible Properties: These are untouchable objects like patents and royalties.

Methods to Calculate Property Taxes

In India, there is no thumb rule to calculate property taxes as different states use varying methods of calculation. However, they consider some common factors while doing the calculations, including the occupancy status, property type, property location, carpet and floor area, number of constructed floors, etc. Prime methods of calculating property taxes in India are as follows:

Capital Value System: Mumbai’s municipal authorities use this method to calculate property taxes. In this method, the property owner must pay a tax on a percentage of their property’s market value. Depending on the property’s location, the state government determines its market value on an annual basis and announces it on multiple platforms. 

Unit Area Value System: Municipal authorities of Patna, Delhi, Kolkata, Bengaluru, and some other Indian cities use this method of calculating property taxes. The property owner has to pay a tax according to the per-unit price of the built-up area. They calculate the property’s per-unit price based on its location, land price, and usage. After determining the per-unit price, multiply it with the property’s built-up area to get the exact property tax to be paid.

Rateable Value System: Also known as the Annual Rental Value System, cities like Hyderabad and Chennai use this method to calculate property tax. This method considers the property’s annual rental value to calculate the tax. Remember, the property’s annual rental value does not depend on the rent collected from the property, but the municipal authority decides it based on the property’s size, location, surrounding landmarks, and amenities. 

Calculating Income from the Property

A property owner may calculate income from the property based on these points:

  • Remember, municipal authorities only consider the property’s net annual value for taxation. They determine this value by deducting municipal taxes from the house’s gross yearly value.
  • If the property is vacant for an entire financial year, they calculate the income based on the rent for only a specific period. They do not calculate it for the whole year or twelve months. 
  • If the property is vacant, but the owner still pays the property tax, it may offset other sources’ income. If it is not adjusted in the current financial year, it can be carried forward over the next eight years.

Exemptions on Property Tax

There are several sections under which a property owner can avail exemptions on their property tax payment. For instance, under section 80C, a property owner may claim a tax deduction of up to Rs. 1.5 lakhs on registration charges and stamp duty on home loan. There are special exemptions for senior citizens and for property owners who have property in a famine zone, etc. Some tax exemptions depend on the property owner’s net income, property type, and history of public service. 

Interest Rate on Property Tax

A property owner has to pay interest only when they do not pay taxes on time. The chargeable interest rate varies from one Indian state to the other, and it is often a certain percentage of the due tax amount, ranging from 5 to 20%.

After understanding how property tax is calculated and getting the tax amount, a property owner may visit their area’s municipal corporation office or a designated bank affiliated with the municipality. These days, municipal authority websites allow property owners to pay taxes online. Pay the taxes in time to avoid any interest charges and save money. 

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