Property Tax In India

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If you have seen the movie “Lagaan”, just as the villagers of” Champane” were requested to pay the Tax or Lagaan to Britishers on the value of their land and crops, In a similar metaphor, Indians are requested to pay the property tax which is based on the value of the property, which is determined by the local government. The only difference is that we cannot bet against the tax for a “Cricket Game” or “Doogna Lagaan” here and we have to pay “Normal Standard lagan”

Where it all started

Back in the old times around the 1990s, the property tax system in India was relatively simple and straightforward. The taxes were levied on the basis of the built-up area of a property and the rate of taxation was fixed by the local government. The taxes were collected by the local municipalities and were used to fund the maintenance and development of local infrastructure and services. The property tax system in 1990 was characterized by low tax rates, minimal enforcement, and limited incentives for property owners to declare their property accurately. Fast forward to 2022, and the property tax system in India has undergone significant changes. The Indian government has implemented several reforms aimed at improving the efficiency and fairness of the system, while also increasing its revenue collection. One of the most notable changes is the introduction of the property value-based system, which determines the tax liability of a property based on its market value. This change has been made to ensure that property owners who have larger and more valuable properties pay a fair share of the tax burden.

In addition to these changes, the Indian government has also introduced several incentives and exemptions to encourage property owners to declare their property accurately and pay their taxes on time. For example, property owners who declare their property accurately and pay their taxes on time may be eligible for lower tax rates or exemptions from penalty fees. These incentives are aimed at improving compliance and ensuring that all property owners contribute their fair share to the tax system.

The GST angle

One of the most significant examples of the changes in the property tax system in India is the implementation of the Goods and Services Tax (GST) in 2017. The GST replaced a complex web of indirect taxes and brought uniformity to the tax system across the country. With the introduction of the GST, the property tax system became more transparent and efficient, with a simpler and clearer process for property owners to pay their taxes and access information about their property.

For residential properties, the GST rate is generally applicable if the property is newly constructed or is still under construction. In such cases, the builder or developer charges GST on the sale price of the property. The GST rate for under-construction residential properties is currently 5% with an input tax credit (ITC).

For commercial properties, the GST rate is applicable if the property is used for business or commercial purposes. The GST rate for commercial properties is 18% with an input tax credit (ITC).

In the case of the sale of a pre-owned residential property, GST is not applicable, as the transfer of ownership of an already constructed property is considered a supply of service, which is outside the purview of GST.

Difference between Residential and Commercial property

Residential properties are generally self-owned properties like “Single-family homes, Apartments or flats, Townhouses, Villas or bungalows, Duplexes or triplexes “

Commercial properties are leased or used for commercial purposes, which generates income for the owner, such as “PG, hostel, Co-livings, Homestays, Office buildings, Retail shops and shopping centers, Restaurants and cafes, Hotels and motels, Warehouse and industrial spaces”

Residential properties are typically taxed at a lower rate than commercial properties, as commercial properties are considered to generate more income and demand more infrastructure and services. For example, in Mumbai, the property tax for residential properties is calculated based on the property’s built-up area and is levied at a rate of 0.45% of the property’s market value. On the other hand, commercial properties in Mumbai are taxed at a higher rate of 1.50% of the property’s market value. This higher rate reflects the fact that commercial properties generate more income and demand more infrastructure and services.

How is property tax calculated in India?

In India, the property tax is calculated based on the value of the property, which is determined by the local government authorities. The exact method of calculation varies from state to state, but some common factors include:

Built-up area: The built-up area of the property is a major factor in determining the property tax. This refers to the total area of the property that is covered by walls, roofs, and flooring, excluding open areas such as balconies and terraces.
Market value: The market value of the property is another factor used to calculate property tax. This refers to the estimated value of the property in the current real estate market.
Net annual value (NAV): For commercial properties, the property tax is often calculated based on the net annual value (NAV), which is calculated as the difference between the rent received and the maintenance expenses incurred.
Tax rate: The local government sets a tax rate, which is typically a percentage of the property’s market value or NAV. The tax rate can vary depending on the type of property, such as residential or commercial, and the location of the property.

To calculate the property tax, the authorities first determine the built-up area, market value, or NAV of the property. Then, they apply the applicable tax rate to arrive at the property tax amount.

For example, if a residential property in Mumbai has a built-up area of 1,000 sq. ft. and a market value of Rs. 1 crore (10 million), the property tax would be calculated as follows:

Property tax = 0.45% of market value = 0.45% of Rs. 1 crore = Rs. 4,500

Similarly, if a commercial property in Mumbai has a built-up area of 1,500 sq. ft. and a NAV of Rs. 18 lakhs (1.8 million), the property tax would be calculated as follows:

Property tax = 1.50% of NAV = 1.50% of Rs. 18 lakh = Rs. 27,000

In conclusion, the property tax system in India has come a long way since 1990, with several key changes and reforms aimed at improving efficiency, fairness, and revenue collection. The introduction of the property value-based system, the use of technology to improve accuracy, and the introduction of incentives and exemptions for property owners are just some of the ways that the Indian government has improved the property tax system over the past few decades. These changes have had a positive impact on the property tax system in India, making it fairer and more efficient for property owners and taxpayers.