Property Tax: What is it used for? How is it calculated?

Property Tax is like any other tax and is collected from owners of residential and commercial properties.  Generally, the government collects property tax through the civic bodies and panchayats. Every owner of lands or tangible assets like residential properties, office buildings, commercial buildings and any other real estate asset, is liable to pay property tax.  

Property taxes in India play a significant role and are applicable to every sort of property including self-owned residential places and commercial premises rented out to third parties. 

However, property has been classified into separate categories for the ease of tax calculation. Understanding how it is used and calculated will help owners of tangible assets to estimate their tax liability better.

Types of property under Property Tax

In India, properties are generally classified into four categories for Property Tax purposes.

1. Land:  Land or plots without any construction on it. 

2. Improvements made on land: Immovable constructions made on lands like residential building, office, godown and commercial building etc.   

3. Personal property: Movable assets like cars, buses, cranes or other vehicles

4. Intangible assets: Intangible assets like licenses and patents 

How is property tax calculated?

In India, property tax is dependent on various factors and it varies from state to state, depending on its area, occupancy status, type of property, amenities, year of construction, type of construction, floor space index and carpet area of the property.

Generally, the following formula is used for calculating property tax.

Property Tax = Base value × built-up area × Age factor × type of building × category of use × floor factor  

However, the municipal authorities use one of the following three methods for calculating property tax

1.    Capital Value System (CVS): Property tax is derived as a percentage of the property’s market value. It may differ according to location.

2.    Unit Area Value System (UAS): The tax amount is calculated based on the per foot price of the total area of the property.

3.    Annual Rental Value System or Ratable Value System (RVS): The property tax is calculated based on the derived rental value of the property as per its location.

What is property tax used for?

The money collected by the government from property taxes is used by the local governing bodies and authorities for funding various public facilities that can benefit the community. It can be used for the maintenance or repair of various public facilities such as roads, parks, schools, sewage systems, and water supply.