Home is the place where love lives. Owing a house is one of the significant achievements of our lives. There are several documentation and processes that we need to go through in case we are buying a new house. One such term you might have heard while your house hunt is 'Pagdi.' The pagdi system has been a prevailing practice across India since the pre-Independence era. Even though the number of people who are the tenants under such a system today, may not be high. As per, Section 56 of the Rent Control Act, 1999, this consideration paid to the landlord as a premium, fine, or compensation (pagdi) was legalized. The act gives authorization for a tenant to get any amount in consideration of the rejection or transfer of his tenancy. The pagdi-kiraydar system assured the tenant that in spite of price inflation or other fluctuations, the rent paid by them would be minimal. Even in the present time, the pagdi system is still prevalent in south Mumbai, where some tenants pay a rent of Rs 500 per month when market rates might be as high as Rs 50000 or more.
How does the system work?
What will the landlord get if the tenant is paying him the sane for years altogether? Have a look at the system in some detail. Pagdi system is similar to any other renting system that is prevalent across India. This "pagdi-kirayadar" system was launched before independence to avoid paying excessive taxes to the British. In this system, verbal agreements play a significant role in property transfers. The tenants are given a receipt of rent payment, and further payments are paid in full to the landlord. The tenant is part owner of the house, not the land. This tenant has to pay rent to the owner as long as he is not sub-renting the premises. Besides, the tenant or the part-owner even has the right to sell the said property while giving a percentage of the total amount to the real owner. This percentage varies from anywhere between 30-50%.
In the case of sub-renting, the owner of the property and the old tenant (now a landlord) shares the rental amount between them. The ratio is typically at 35:65. By practicing this, the owner makes some money off his asset while avoiding taxes. The old tenant benefited, the new tenant rented premises with low rent.
For better understanding, here's an example- Under Pagdi system, if an existing tenant wants to sell his home for Rs 20 lakh, he is obliged to pay around 6 to 10 lakh to the real owner. Moreover, the purchaser of the land is said to be a tenant. Not to mention, he enjoys limited rights because the landlord collects minimal rent and gives the receipts accordingly.
What is the benefit?
No doubt the landlords and tenants using the pagdi system avoid taxes, but it is not the legal way out. Then, how does the system helps? The pagdi system helps in keeping the housing prices in check and speculation under control, thereby assuring affordable housing to ordinary people.
Most owners and landlords agree that the pagdi system is unfair. However, the tenants who stay in large flats in Mumbai are against this State government-proposed latest plans of eliminating the old system and adapting the Model Tenancy Act proposed by the Central Government. In case the amendment is passed and implemented, then tenants living in the properties above 847sqft and 547sqft will have to pay rents based on the current market rates which is somewhat 200 times higher than current rents they are paying.
No matter where you live, and what rent you pay, covering your house is of utmost importance. A home insurance policy covers your house and valuables against several natural and man-made disasters. These days, buying a home insurance policy is quite simple. The process is paperless and hassle-free. We suggest you insure your home and essentials to avoid unfortunate circumstances.