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Information on Property Tax in India

Information on Property Tax in India
August 12
16:05 2014

A property tax is a tax levied on property that the owner has to pay. The tax is levied by the governing authority of the jurisdiction in which the property is situated. The tax may be paid to the national government, a state or a municipality. Multiple jurisdictions may levy tax on the same property.

Property tax is commonly referred to as house tax in India. It is a local tax on buildings, along with appurtenant land, and has to be paid by the on owners. The property tax in India is similar to the US-type wealth tax and is structurally different from the excise-type UK rate. The power to tax is given to the states, and it is delegated by law to the local bodies which specify the valuation method, the band of rates and of course, the collection procedures. The tax base is the annual rental value (ARV) or area-based rating. The properties, which are occupied by its owners, and other properties which do not produce rent, are assessed based on their value and are then converted into ARV by applying a percentage of cost which is usually about six percent. Land, which is not occupied, is usually exempted from taxes. Properties, which are under the Central government, are also not taxed. In lieu of the normal property tax, a service charge is permissible based on executive order. Properties which are under foreign missions also enjoy an exemption from paying tax without insistence for reciprocity. The normal property tax is usually coupled with a number of service taxes for instance water tax, drainage tax, conservancy (sanitation) tax, lighting tax. All of this use the same tax base. The rate structure is flat on rural properties, which come under the panchayats, but in the urban areas which come under the municipal, it is slightly progressive with almost 80% of assessments falling in the first two slabs.

Two kinds of tax regimes are applicable on buying or selling property in India namely short and long term. The rate applied in the short term, and long term tax on buying or selling of property in our country looks to be rather similar at the surface level. However, the difference comes in inflation indexation, which is often, the victim of oversight by a cursory glance during the buying or selling procedure.

In case, a property is bought and then sold within three years of purchase the short term property gain tax is applicable. In such a scenario tax on profit gains after deducting the acquisition price, money spent on property improvement, and transfer cost needs to be paid by the owner. The profit constitutes a part of the taxable income and tax needs to be paid on it as per the applicable tax slab of an individual. Nevertheless, if a loss has been incurred during buying the property and selling it in the short term, the loss can be carried forward to claim tax deductions for up to eight years by an individual.

On the other hand, it is a completely different thing when it comes to long term profit gains. Individuals who have owned a property for over the three year threshold are eligible to get the usual deductions of acquisition cost and property improvement. However, these adjustments are adjusted against inflation. Consequently, the property margins are depleted considerably for periods extending to more than five years.

A con of having long term capital gains on property sale in India is that one cannot claim regular tax deductions. Although, if one falls under the limit of tax exemption, in such cases one’s capital gains are not taxed.

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