Property Tax: What is Property Tax & How It Is Calculated?

Buying and owning a home is one of the most common milestones in a person’s life, and achieving this goal is a dream come true. But whether you are a first-time buyer or a seasoned property owner, paying taxes is one of the most important responsibilities for any homeowner.Understanding the intricacies of property tax can help you manage your finances and ensure compliance. Through this guide, you can unravel everything you need to know to make clear, informed decisions about property tax. Also read: What You Should Know About Tax on Inherited Property

Property tax, or house tax, is the amount of money you, as a property owner, must pay the area's local government or municipal corporation. Owners of properties, such as houses, business plots, shops, rented properties, land, etc., are liable to pay property tax.Generally levied semi-annually or annually, governments use this tax to develop and maintain public infrastructure such as footpaths, roads, drainage systems, sanitation, parks, and garbage collection.

To simplify the taxation process, the government of India has divided properties into different categories.

• Personal property: This includes movable objects such as cars, cranes, buses, etc.
• Land: It refers to any piece of core land devoid of construction or improvement.
• Improvements to land: Land improvements in construction, like warehouses, buildings, etc., come under this category.
• Intangible property: This includes ownership of properties without physical substance, such as patents, copyrights, and royalties.

Any individual or entity that owns a property must pay property tax to the municipal corporation of the relevant area. In the case of joint ownership, the primary owner can nominate the joint owner to pay the tax.While the tax percentage varies from state to state, property tax is generally between 5% and 20%. Usually, it depends on various factors, such as locality, the property's market price, and the property's age.

Any property- building or land used for religious, educational, or charitable reasons is generally not liable for property tax.

Section 24 covers two types of deductions- standard and deduction on interest against Home Loans. Under standard deduction, 30% of the net annual value is exempt from tax and does not apply to an owner who occupies the only owned home. Section 24 also exempts any interest paid on a home loan's principal, and if self-occupied, the exemption is ₹ 2 lakhs. After availing of a loan, individuals must purchase or complete construction within three years of tenure. If incomplete, the individual can claim only ₹ 30,000.

1. Capital Value System:

Under this method, the property's market value decides the tax on a particular property. It is generally a percentage of the property's market value. You can find a property’s market value, which depends on the locality, in the annual ready reckoner that the government publishes. This method is used for calculating the tax on properties in Mumbai.

2. Unit Area Value System:

This system does not depend on the market value of a property for tax calculation. The municipality determines property value, or Unit Area Value, based on land price, location, and usage in this system. The method involves multiplying a property's per-unit cost of the built-up area by the Unit Area Value to get tax valuation. Municipal authorities, such as Bengaluru, Delhi, and Kolkata, use this system.

3. Annual Rental Value System:

Under this system, the property tax is determined by its rental value. Factors such as proximity to amenities and landmarks, property condition, and size determine the rental value. Chennai and some parts of Hyderabad use this system.Though property tax depends on your property's location and different calculation methods, the basic calculation remains unchanged. Authorities assess a property based on its area, amenities, carpeted square size, occupancy status, construction type, floor space index, and type. After evaluating all parameters, the authorities can use any applicable formula to calculate the tax. You can calculate tax online on the official website of the municipal corporation in question.

Most municipal corporations provide you with the flexibility of paying property taxes online. Follow these basic steps:

• Log in to your municipal corporation's official website
• Choose the tab that indicates property tax and select the payment option. (Keep the tax bill handy for all necessary details)
• Fill in the essential details such as location, property type, property tax number, and revenue survey number
• Select the assessment year. Select the previous year, too, if there are any dues.
• Choose a payment method to complete the online tax payment

It is essential to have the tax application number (TAN) handy to pay property tax online. Here are the steps to get the TAN online.

• Log on to the property tax page on the municipality's website.
• Select the option 'GIS-based New PID' option.
• The bottom of the page has the option 'To Know Your New PID Click Here.' Click this option and enter the old application number
• Click on 'Search', select the name, and click 'Fetch'
• The screen will then display all the information
• Check for any inconsistencies

After paying your property tax, you can follow these steps to download the challan online.

• Visit the local municipal corporation's official website
• Login with OTP to access the citizen account
• The screen displays all details of property tax payments
• Select 'Action' and click on 'Tax Paid Details'
• Choose 'Download Receipt' and click 'Download' to complete the process.

There are certain tax-related implications you should consider before investing in a property.

Type of Property:

A property, whether residential or commercial, generates the same income concerning taxation. Therefore, irrespective of the type, a property will lead to tax under the section 'Income from House Property.' Property can also belong to one of the three categories: Let-Out, deemed to be Let-Out and Self-Occupied.Tax Deduction on House Loans: Tax laws include multiple sections that allow you to save taxes if you purchase the property through a Home Loan.

• Section 24: If you have occupied the property, there is a yearly tax deduction of up to ₹ 2 lakhs. However, if you let out the property, you can claim the interest as a deduction.
• Section 80C: Under section 80C, the principal part of a loan is eligible for a tax deduction of up to ₹ 1.5 lakhs.
• Section 80EE: As a first-time owner, you can benefit from an additional tax benefit of up to ₹ 50,000.

Also read: Understanding Section 80C: How to Maximize Your Tax Savings

Income from House Property:

When you earn income from house property and do not use it as an office, it is added to your total income for tax calculation in an annual year. If you have more than one property, of which one is vacant, it is 'deemed to let out.' In this case, your gross income will be your earnings plus a fair rent rate on the vacant property.

Claiming Tax Deductions on Housing Loans:

As a salaried owner, you must submit the loan interest certificate to your employer, who will then deduct the tax Deducted at Source (TDS) . Alternatively, you can also claim a refund when filing your tax returns.

Joint Housing Loan:

You can also consider taking a joint housing loan to save on tax if you and your spouse are working. Children and parents can also take joint loans. Also read: What are the Benefits of Joint Home Loan

Understanding property tax and its inner workings is essential for making informed decisions about property ownership, budgeting, and financial planning. Owning property is a matter of great pride. And being responsible towards your country by diligently paying your taxes even more so.Ready to make the most of your money? Start your tax planning journey now!