Why India's Cities can't crack property tax even after digital push

Cities are experimenting with online portals, waivers and service linkages, yet India's property tax collections remain weak, undermining municipal finances even as urban responsibilities keep rising

India’s cities are pushing harder than ever to raise property tax revenue, yet the needle barely moves. Digital portals, rebates and one-time waivers promise efficiency, but collections remain stubbornly short of targets. And now, a reform drive meant to strengthen urban finances is instead exposing weak systems, poor compliance and political hesitation.

 

Delhi has clubbed licensing of factory licences and general trade licences for hotels, restaurants and others with the property tax portal to ensure businesses have less paperwork to deal with. Announced in the just presented municipal Budget, the measure is expected to nudge the collections from the tax generously. But aggregate Budget projections for FY27 will be less by Rs 470 crore from FY26.

 

Cities, however, are trying out new ways to cajole homeowners to pay property tax and pay regularly. As a uniform carrot, none of the cities except Kolkata have raised their rates for quite some time.

 

Property tax receipts across India were supposed to reach Rs 40,000 crore by the end of last calendar year. As the table shows, even a year later, the numbers will not cross Rs 30,000 crore. The estimate was made in a report by the Ministry of Housing and Urban Affairs just five years ago, in 2020.

 

The estimate of property tax from the financial statements of over 1,000 urban local bodies (ULBs) meant a compounded annual growth rate of 18 per cent. The aggregate was approximately Rs 20,000 crore in 2020. “This is far lower than peer countries and investment required in urban infrastructure,” the Toolkit for Property Tax Reforms noted.

 

As the table shows, none of the municipal administrations of any cities is showing this level of buoyancy, including Mumbai which has the largest receipts among all Indian cities.

 

To make the numbers move up, all the metros and other cities have made tax collections online. It has had a sporadic impact. Pune, for instance, has seen its property tax receipts soar but Gurugram is struggling to reach even 50 per cent of its annual target.

 

This has substantial implications. Property tax is the largest contributor to the receipts of the municipal administrations, yet these have underperformed.

 

Property tax is, incidentally, levied by the state governments. Under the Indian constitutional system, municipal bodies do not have the right to charge a tax. They can only impose a charge for services provided. States impose the tax but under the same law, give the municipalities the right to collect and retain those.

 

This is why the 15th Finance Commission has charged the states to set up floor rates and “thereafter show consistent improvement in collection in tandem with the growth rate of the state’s own gross domestic product.” This is important for the urban local bodies to qualify for grants from 2021-22 onwards. But that has hardly budged the speed of collections.

 

A variation of the same formula is expected to be applied by the 16th Finance Commission in its report. The report has already been submitted to the government and the Finance Ministry will table it in Parliament soon.

 

In Hyderabad, of the total tax receipts of Rs 2,012 crore, a quarter was raised through a one-time settlement offer by the state government. It had announced a 90 per cent waiver on penal interest if the tax arrears were settled with 10 per cent interest. The jump happened because it was the first time the administration was reconciling tax data of the size of the buildings with the sale records and GIS mapping.

 

In Gurugram, municipal records show there are 6.6 lakh properties under the MCG’s ambit. A massive quarter of these, 1.7 lakh, had filed objections to the online data on their properties. So in many cities, making the data online has not helped. Gurugram has received only half of its targeted Rs 500 crore of property tax and this is for the assessment year 2023.

 

This is even though the rates are absurdly low in most cities. Again in Gurugram, for houses up to 1,000 square yards, a bungalow by any reckoning, the rate is Rs 6 per square yard. Even the Rs 6,000 by this reckoning is perforated with exemptions.

 

In Delhi, the numbers were just a shade better this month. MCD was pleasantly surprised with a 30 per cent jump in property tax receipts in FY25, year-on-year. But this could flatten out soon as homeowners are already protesting the reclassification of their house units.

 

Like Delhi, other cities have also tried new methods to make homeowners pay more. The risk is that clubbing a service delivery with a tax is a questionable practice. Lucknow Municipal Corporation, for instance, has tried to link waste collection fees with property tax rates. It has also linked a rebate on rates with online payments since a third of the city’s owners filed their returns offline.

 

In Jaipur, the municipal corporation has gone a step ahead. The corporation is offering QR codes on tax notices sent out to residents. For those not willing or unable to do so, there is a doorstep collection facility of the tax.

 

The West Bengal government has rolled out a 10 per cent rise in property tax rates over a five-year period for all municipalities since it is not able to create an updated list of properties. The rise will impact all areas of Greater Kolkata except the one run by the Kolkata Municipal Corporation.

 

The problems do not change much with the North-South divide. Coimbatore in Tamil Nadu has not been able to rely online. Only 55 per cent of the total dues for this year at Rs 522 crore has been collected despite holding camps and campaigns. The arrears from last year is another Rs 134 crore.

 

At the end of this year, cities will still be far away from the Rs 40,000 crore target, but many of them have begun to try in earnest.