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Why is 'Property Tax' collected in India?

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When you buy a new home or invest in land or other forms of real estate, you are required to pay stamp duty charges along with registration charges on the consideration value of the property. While these are one-time charges, property tax is a recurring charge that the property owner must pay each year.

As the name goes, property tax is the amount that is paid by a land or property owner to the local civic body or municipality where they own property. In this context, the word 'property' includes real estate, house, official building, factory, and the property of any kind that has been lent to others on lease or rent. The amount collected from property tax is used for public services like schools, buildings, sanitation complexes, repairing roads, etc. This tax is usually charged on private facilities, while central government buildings and vacant properties are exempt from paying property tax.

However, the reality in India is far from what it is expected to be. The property tax collection process is plagued by inadequate property assessment, inefficiency in the collection, exemptions of a large scale, and corruption.

Different Types of Property Tax

Property tax is classified into four categories:

  1. Personal Property
  2. Land: Privately-owned land attracts property tax, but land belonging to the central government, religious organisations, defence or armed forces and land restricted for agriculture does not attract property tax
  3. Improvements made to the necessary land
  4. Intangible Property

Based on the type of property you own, the municipal or civic body assesses and valuates the property before deciding on the amount of tax one needs to pay. The payment for property tax needs to be made either annually or semi-annually.

Why Should We Pay Property Taxes?

Civic bodies use the property tax collected from property owners for various services offered to citizens in the area. The property tax you pay is used to improve facilities such as:

  • Cleanliness
  • Sanitation
  • Garbage collection
  • Water supply
  • Maintenance of local roads
  • Drainage facilities
  • Civic facilities

So, in a way, property tax is a source of revenue for municipal bodies. Every property owner is liable to pay tax for the properties they own, or the municipality can refuse services like water supply, water connection, garbage collection, etc. Not abiding by these rules can also result in the civic body initiating a legal procedure against you.

Apart from these reasons, there is more to paying property tax. As we now know, this tax is calculated according to the recent valuation of the municipality or civic body's property. The property owner is liable to pay the tax and not the tenants. So, in case of a property dispute, the property tax receipts play a significant role in proving one's ownership of said property.

Also, when you buy a property, the same details must be updated in the municipal records. If you wish to transfer your property ownership to the next buyer, make sure the same has been changed in the civic body forms or the previous owner's name will show in the tax receipts. To update your records in the municipality, you must take the necessary documents to prove your ownership. The receipt given for paying property tax is also essential if you wish to borrow against the property.

This tells us how property tax collection offers benefits to property owners as well as the civic body.

How is Property Tax Calculated?

The amount of money that a house owner can pay the municipality as tax is property tax. The amount of property tax one needs to pay varies from location to location.

Other factors that determine how property tax is calculated to include:

  • Property Size: Larger sized properties are levied a higher property tax
  • Status of your property: Is your property under-construction or ready-to-move?
  • Property owner gender: Women property owners get discounts and more benefits on property tax
  • Age of the property owner: Senior citizens get discounts in property tax
  • The facilities provided by the municipality where the property is located in

There are three ways of collecting property tax:

  • Capital Value System(CVS)
  • Annual Rental Value System
  • Unit Area Value System

Conclusion

Property tax laws and regulations vary from one place to the other, and while specific properties are charged heavy taxes, others enjoy rebates. Non-payment of property tax attracts a fine/penalty. Today, it is effortless to calculate and pay property tax on any properties that you own with technology.

Also read:

1) Presumptive Tax: Ways to File Returns & Save Taxes for Creative Professionals
2) The USA vs India: Taxation System
3) How does the Income Tax System work in India?
4) Capital Gains Explained: Definition, Types, Exemptions & Tax Saving