What is property tax and how it is calculated?

Local administrations collect taxes on land properties. This collection is done through property taxes, which every local government implements through an ordinance or bylaw—either annually or biannually. This system ensures that property owners contribute a portion of their taxes to help fund essential services. Typically, these taxes are allocated to support local schools, police and fire departments, road improvements, and community projects.

In this blog, we will discuss what is property tax and address key issues such as its implications, what is involved in property taxes, the specifics of house property tax, and the details surrounding property tax on residential properties.

Indian cities heavily rely on property tax as a significant source of revenue for municipal governments. Let's take a closer look at what is house property tax in detail. Property refers to all tangible assets owned by an individual. The property tax on a house is the tax levied on real property, which can be residential. Property owners generally must meet this levy according to what the amount of the school tax maybe that is assessed along with the residential property.

Every year, property owners are required to pay property tax to municipal corporations or local governing bodies.

Tax on Real Property by State and Local Government

In many jurisdictions, funds are primarily drawn from property taxes to finance the local government but also over-dealing in providing public services. As an example, tax revenues garnered from property ownership are an indispensable source of funding for the provision of schools and emergency services.

Property tax rates vary significantly depending on location and type of property. Let us understand the different types of property taxes. Generally, it can be classified into the following types:

a) Residential Property Taxes

Residential properties are mainly used as housing, such as houses, flats, and apartments. The tax rate for residential properties is typically much lower than that for commercial or industrial properties.

b) Commercial Property Taxes

Commercial properties are used for commercial use, such as offices, retail shops, hotels, and malls. Commercial property tax rates are normally higher because such properties generally produce income.

c) Industrial Property Taxes

Industrial properties are used as factories, industries, and for industrial purposes. Thus, such taxes are higher than residential property taxes, but this rate may vary depending on the specific industry and its economic impact.

The assessment of property tax is done uniquely with various aspects and steps depending on the nature of the property and the locality in which the property is located. The steps involved in calculating property tax are explained below.

a) Property Assessment

Local authorities determine the value of a property mainly because of market conditions, location, and other factors.

b) Property Tax Rate

Each local municipality differs in terms of its tax rate. This would depend upon the community's budget and requirements to offer public service.

c) Exemption of or Deductions in Property

Some resources and properties are left out from filing such tax, particularly by senior citizens or veterans. However, there could be deductions.

Example Calculation

For example, suppose a homeowner has his/her house assessed at INR 300,000 and a local tax rate allows for 1.25% to calculate the property tax: Property Tax = 300,000 x 0.0125 =3,750
The outcome is that the homeowner will be paying INR 3,750 in that year as property tax.

Property tax rates are influenced by a variety of factors, including the economics of that place and the specific individual characteristics of property. The following are the major factors that affect how much property tax someone has to pay:

1. Location

Location influences how much a property is liable for tax. Tax rates in urban areas are likely higher than those in rural areas because there is much more demand for public services such as education, infrastructure, emergencies, etc. These services have led local governments to allocate more revenue to property taxes to fund the services.

2. Nature of Property

Properties are all treated differently for tax purposes according to the category to which they belong. Residences, shopping malls, and industries are kept with different tax levels due to their different consumptions and different kinds of necessities for governmental service. Commercial, industrial, and other specific properties have a high tax rate, above all, because generally, traffic attracted by ways of investment is the highest user of public service.

3. Local Government Budget Needs

A crucial factor affecting local government finances is the budget requirements tied to property tax rates. Each year, local administrations assess their funding needs for public services and infrastructure development based on valid estimates. This total funding requirement is then divided by the total assessed value of all properties within the jurisdiction to establish the applicable tax rate. Furthermore, local governments may adjust these rates in response to changes in property values and economic conditions, which can vary from year to year.

Homeowners and potential buyers should understand how property taxes are assessed. This knowledge is crucial for effectively managing budgets related to homeownership expenses. By understanding the details of property taxes, homeowners can engage with local government assessments and challenge any inaccurate valuations.