How Is Property Tax Calculated

Property tax is imposed on real estate owners by municipal authorities and is used to maintain local civic amenities/ infrastructure facilities. “It is based on the value of the property and the rate of property tax and manner of valuation varies from one municipal authority to the other,” says Meghna Mishra, senior partner, Karanjawala & Co. 

It is usually levied on all real estate, including buildings (residential/ commercial), attached land, and improvements made to the land, but not on vacant plots of land.

There are three main ways of calculating it. 

Capital Value System (CVS): The local government calculates property tax as a percentage of the property’s market value based on its location. A property in a prime location has a market value of Rs 1 crore. If the municipal authority sets the tax rate at 0.5 per cent, the property tax would be Rs 50,000 (1,00,00,000 × 0.5 per cent).

Annual Rental Value System (ARV) Or Rateable Value System (RVS): Tax is calculated based on the property's yearly rental value. There is no rule that the property must be rented out, rather the tax is assessed based on how much rent the property would generate in case it was rented out. 

Various factors are considered to determine the ARV. One is the size of the property. Larger properties have a higher rental value. Location is also a factor, as properties in prime locations are more expensive. The condition of the property is also a factor, as a well-maintained property can command higher rental values. Proximity to key landmarks such as commercial hubs, schools, hospitals and so on can also influence the rental value. 

A residential property has an estimated market value of Rs 1 crore. If the property’s annual rental value is estimated as five per cent of its market value (Rs 5 lakh), and the tax rate is 10 per cent, the annual rental value tax would be Rs 50,000 (Rs 5,00,000 × 0.10). 

Unit Area Value System (UAS): “The tax is levied on the per unit price of the built-up area of the property. This price is fixed based on the expected returns of the property as per its location, land price, and usage, and is then multiplied with its built-up area,” says Mishra. 

If the built-up area is 20,000 sq. ft. and the per sq. ft. unit area value is Rs 500 (the total property value is Rs 1 crore), then the tax rate at five per cent of this value would be Rs 5 lakh.

Property tax can be paid online through the municipal corporation website or offline by visiting the local municipal office. After the tax is paid, a receipt is issued to the taxpayer for future reference. Late payment of property tax can attract a fine, which can be a certain percentage of the amount due. This interest varies from state to state.