What is the Property Tax?
The owner of a property has to pay a tax to the government or the local municipal corporation annually or semi-annually. This tax paid by the owner is the property tax. This direct tax is applicable to properties like house, commercial property, real estate, land, and so on.
Property tax is applicable for land with or without construction. The category of the property depending on the area is evaluated by the municipality of that area to assess the tax payable. The appraisal of the property is also done by the municipality of that area. The tax so collected will be utilised to improve and maintain the infrastructure of that area like roads and schools.
Since property tax is determined based on the area where the property is located, it is different for areas within the city and for areas between cities. It is also different for each municipality depending on the locality.
If any kind of business is carried out in the property owned, then that income is categorised under 'income from business' for tax purposes. The expenses incurred towards repairs and renovations of such property can be claimed as business expenditure.
Types of Property on Which Tax is Collected
Properties are classified into different categories to make the assessment of tax simple and specific to a category. There are four categories:
- Moveable properties - any kind of vehicle
- Immovable properties - land
- Immovable properties - land and building
- Intangible properties - patent, franchise, goodwill, etc.
Advantages of Property Tax
The following are the advantages of property tax:
- This is the most reliable form of revenue for the government since real estate is utmost sensitive to fluctuation in price.
- Property tax cannot be evaded since it can be secured by the property. Since the cases of the property tax evasion are minimal, the revenue generation for the government from this segment is assured.
- A challan with details of the tax liability can be generated. The entire assessment of property tax for a particular property is transparent. In case of any doubt, the owner has the option to submit an appeal disputing the same.
Disadvantages of Property Tax
The following are the disadvantages of property tax:
- The assessment of property tax is very resource oriented unlike the voluntary reporting of taxes. The cost of administration of tax involves both administrative cost and compliance cost. In the case of property taxation, the administrative cost is high and in the case of voluntary reporting of taxes like the income tax the compliance cost is high.
- The lumpsum payment of property tax that is levied on unrealised capital gains becomes very difficult for companies that have several properties but have cash flow issues.
- The relationship between the appraised value and tax is often misunderstood. This becomes a disadvantage in comparison with the fixed taxes like the income tax. More so when the authorities allow long periods between reappraisals and the end result comes as a rude shock to the property owners.
- There is an imbalance in the property tax appraisals since the evaluation is based on the class of the property and the ratios vary as per the class of the property. There is no uniformity in the classification of the properties resulting in the imbalance in appraisals.
Section 24 - Property Tax Deductions Against Income
Under Section 24, deductions from income of the house property are allowed in the cases mentioned below:
- You will not get any income from the property if you are residing in the house you own. The income generated by way of rent and the value of additional houses annually is taxable after deductions under Section 24.
- In case you are the owner of other properties apart from the one you are residing in, then the net annual value of all other properties, excluding the one you are residing at will be considered as income.
- The rent received from the house that is given out on rent is taken as income
Details of Deductions Under Section 24
The deductions are of two kinds under Section 24 for a property owned in India:
- Housing loan interest: If you have availed a housing loan for construction, purchase, or renovation, the interest paid on the principal amount is eligible for a tax deduction. Under this, there are three different clauses.
- If the Home Loan is availed for a self-occupied house, then the deduction is up to 2 Lakhs.
- For the loan availed for either purchase or building of a house, you can claim a deduction on the interest component even before purchase or completion of the project. This is called the pre-construction deduction. In such cases, the deduction should be claimed on the interest component paid before buying or completion of the project. The deduction can be claimed in five equivalent instalments. However, deduction under pre-construction interest and housing loan interest collectively should not exceed 2 Lakhs in a year.
- If a loan is availed for rebuilding or makeover, this clause does not apply
- Standard Deduction: If you are a tax assessee, you can avail an exemption when the income received from your house(s) is 30% of the Net Annual Value. This is not applicable if you are residing in the house you own.
Section 24 - Property Tax Exemptions Against Income
The following are the exemptions against income:
- You will get exemption on the entire interest paid on the principal amount of the Home Loan if you are residing in the house for which loan is availed.
- If you are not residing in the house for which you have availed Home Loan for various reasons, then you are eligible for exemption on the interest component only to the extent of 2 Lakhs.
- The maximum time permitted for completion of construction or purchase of the house is 5 years from the date of availing the Home Loan. In case it is not completed within 5 years then, you can claim the exemption on the interest component only to the extent of 30,000. For years prior to FY 2016-17, the maximum time permitted for completion of construction or purchase of the house was 3 years and it was enhanced to 5 years during the Budget 2016.
- Brokerage or commission paid to avail services of a mediator to procure loan or to find a tenant is not eligible for deductions.
- Interest certificate obtained from the bank for the loan availed has to be provided as proof for verification for tax calculation purpose.
If you are a freelancer or self-employed, submission of the document, i.e., the interest certificate for verification is not required. The certificate will be required only to calculate the advance tax liability for each quarter. The certificate must be available only if the IT Department raises any queries.
Tax Deductions under 80C
- The stamp duty and registration charges to the extent of 10% of the purchase value for the purchase of a new house can be claimed for deduction under 80C. A maximum deduction up to 1.50 Lakhs is permitted under 80C. To claim this deduction, the following conditions have to be complied with:
- A new property has to be purchased or constructed with the Home Loan availed.
- The house should not be sold within 5 years from the date of taking possession. If sold within 5 years, the deduction availed so far will be added back to the income during the year the sale transaction takes place.
- The amount paid towards the principal component for a Home Loan availed for either purchase or construction of a new house can be claimed for deduction under 80C. A loan certificate from the lender has to be produced for verification.
Capital Gains Tax on House
Capital Gain is the profit made out of selling a property. The profit earned out of the sale is taxable. If the sale proceeds are reinvested in a new property within 2 years then you need not pay tax on the profit earned out of the transaction.
How to Calculate Income from House Property?
The procedure for the calculation of income from house property is as follows:
- The net of the gross annual value of the house property and the municipal taxes paid for the house property is the Net Annual Value of the property.
- If your house is vacant for some months of the year and occupied by tenants in the later part of the year then rent received for those months only will be taken as annual income. The annual income after subtracting the standard deduction of 30% and municipal tax will be the taxable income.
- If you are paying civic tax for a property which is vacant and is not fetching any income by way of rent, the loss can be compensated from sources like your income vide salary for the current financial year or rent from other houses. This loss can be carried over for a maximum period of eight years from the financial year when the loss was incurred.
The loss under income from house property was allowed to be compensated from other heads of income up to any amount till the FY 2016-17. Such set off has been restricted to 2 Lakhs from the FY 2017-18. This amendment does not impact taxpayers having a property which is self-occupied. However, taxpayers who are earning an income by way of rent will be impacted by this amendment. There is no limit to claim a deduction on the Home Loan interest under Section 24 but the loss incurred out of such interest payments is restricted to 2 Lakhs.
Calculation of Property Tax
The following factors have to be considered for calculation of property tax:
- Type of property, whether the property comes under the state or municipal corporation
- Different civic corporations have different methods of calculation
- Correct details regarding the status of occupancy-rented or self-occupied, locality, type of property-land, whether commercial or residential, number of floors, carpet and floor area, infrastructure offered etc., should be available.
- If the required details are mentioned on the website of the municipal corporation, the tax can be calculated automatically.
The formula applied for calculation of property tax is:
Property tax = base value x built-up area x Age factor x type of building x category of use x floor factor.
Penalty to between 5% and 20% will be levied on late payment of property tax. The late payment charges vary from state to state. Depending on the individual state policies, the late payment charges can either be waived or reduced.
Steps for Payment of Property Tax Online
A large number of Indian municipalities have made the payment of property tax convenient and hassle-free by providing an online platform for paying it. The normal steps for online property tax payment which may vary for certain town or city corporation, are detailed below and you need to follow them to make the process hassle-free.
- Log in to the municipality website and choose the 'Property Tax' option
- From the category available, choose the right form that is suitable for your property. The form will update the changes that have been made for the category suitable for your house property.
- Choose the assessment year, i.e., the year for payment of tax. This is inclusive of the tax for the present financial year as well as the dues outstanding for the earlier year(s), if any.
- Provide your Number of Property Tax/ Number of Revenue Survey/ Number of Property Identification/ Number of Khata, and other details like type of property, owner's name, related locality, and so on.
- Select the payment mode you prefer, i.e., Debit Card/ Credit Card/ internet banking to complete the payment process.
Points to Remember for Payment of Property Tax Online
You can pay the property tax online through the online platform provided by a majority of the municipalities in India. You can pay the property tax by visiting the municipal website and by providing the Khata Number, Property Identification Number or the Revenue Survey Number.
The points to remember for payment of property tax online are as given below:
- If you have property tax in advance, the surplus amount after adjusting the dues for the previous year(s), if any, will be recredited through DD or cheque after proper verification.
- If there are any pending dues for the previous year(s), the same will be included in the property tax for a particular financial year.
- If you have opted to pay the property tax for the existing financial year in two instalments, the same form can be used for the second instalment also.
- A concession to the extent of 5% will be given if the entire tax amount for the existing financial year is paid in full in a single instalment.
- Only after generating challan for each of the earlier year(s) is generated, payment for the earlier year(s) can be made.
- If paid through cash or DD, the receipt will be generated instantly. In case of payment by cheque the receipt will be generated only on realisation of the cheque.
- For the defaulted period, interest at 2% per month will be automatically calculated
Frequently Asked Questions - Property Tax
Do all the municipal corporations offer the facility of online payment of property tax?
Since the online payment of property tax is a new concept in India not all the municipal corporations are offering this facility. You should clarify with your respective municipal corporation as to whether the facility is available.
What is the definition for a 'deemed owner' with reference to payment of property tax?
A person who becomes the owner by implication is a deemed owner. Deemed owner is any other person other than the person in whose name the property is registered. The person liable to pay the tax is the deemed owner.
A person can be termed as a deemed owner in the following instances:
- If a property is transferred in the name of a minor child or the spouse, for a consideration which is not adequate, then the original owner is the deemed owner. In the case of a spouse, such transfers should not have been made under an agreement of separation.
- If the property is registered in the name of an individual who belongs to a Hindu Undivided Family (HUF), then the HUF is the deemed owner.
- If a member of an Association of Persons or Co-operative Society has been allotted or leased property under any housing scheme, then the member becomes the deemed owner.
- If a property is taken on lease for over a period of 12 years, then the person who has taken the property on lease is the deemed owner of the property.
- A case when a buyer has taken possession of the property under a contract for the transfer of the property by paying the full consideration, but the transfer deed has not yet been registered, has been dealt with by Section 53A of the Transfer of Property Act 1882. In this case, the deemed owner is the person who is permitted to retain possession of the property.
Should property tax be paid for vacant lands?
Property tax is not applicable for lands used solely for agricultural purposes. Otherwise, vacant lands are liable for property tax.
What are the provisions to claim an exemption on property tax?
The provisions are available to claim an exemption on property tax based on the following:
- If the property is owned by a super senior citizen
- The net income of the owner
- If the property is situated on a famine zone or any other similar zone
- The property types
- Public service history of the property owner
In the case of a title dispute pending in the Court of Law, who has to pay the property tax?
If there is a dispute regarding the title of the property in the Court of Law, the assessing officer has the authority to assign one person to pay the property tax. Later if the court ruling is against the person who was assigned to pay the property tax, he or she can claim the amount from the other party.
Who should pay the property tax for the property that is rented out?
For a house property that is rented out, the owner of the property should pay the property tax.
Name the properties that are exempted from Property Tax?
The properties that are exempted from property tax are:
- Temples, burial, cremation grounds, and inherited lands
- Buildings used for educational and charitable purposes
- Land solely used for agricultural purposes
How is the payment of property tax dealt with when the property is held in joint names?
In the case of joint ownership, the property tax is payable by each co-owner in proportion to the shareholding as mentioned in the legal document.