30 JUNE, 2021

Prevalent in cities like Mumbai, Delhi and Kolkata, the pagdi system is a type of rental tenancy. People started following the pagdi system in the pre-independence era to avoid paying excessive taxes to the Britishers. Also called the ‘pagdi-kirayedar’ system, the pagdi system today has reduced to very few areas in the country, but is legalised under section 56 of the Rent Control Act, 1999.

Scroll below to know more about the pagdi system.

How Does the Pagdi System Work?

In the pagdi rental system, the tenant is a co-owner of the property who enjoys all the rights of an owner like selling or sub-letting the property. 

In the pagdi system, the tenant pays a fee, premium or consideration to the landlord as a lump sum payment. On the other hand, the property rent remains unchanged for the tenant, which is much lower than the market rate. Also, as a co-owner, the tenant can sublet or sell the property whenever he wishes to.

If the tenant sublets the property, the rental income is shared by him/her and the landlord in the percentage of 35%- 65%.

Similarly, when the property is sold, the landlord (owner of the property) gets 30-50% of the sale proceeds, and the tenant takes the remaining.

Under the pagdi system, landlords often suffer losses, as the rental of the buildings are drastically lower than market prices. Due to this, it is difficult for the landlord to maintain and repair the building when needed.

How to Sell Your Property to Buy a New Home?

Typically, the pagdi-kirayadar system is carried out with verbal agreements. There is hardly any well-maintained documentation, which makes the sale process easy and quick. However, if the tenant wishes to sell the house, it is recommended that he/she take the No Objection Certificate from the lender. It would be better to ask consent from the landlord about selling the house and transferring tenancy to avoid any inconvenience later. Though there is no thumb rule, he/she would have to transfer 30-50% of the proceeds to the landlord, which is a prominent practice in the pagdi system.

The government has been planning to abolish the pagdi system and replace it with a more regularised rental law for a few years. They plan to bring the buildings where the pagdi system is followed under the Real Estate Regulation (and Development) Act, 2016 (RERA). The government also plans to redevelop old and dilapidated properties under the pagdi system. Though they would provide compensation for redevelopment, it might not be enough to buy a new house.

Instead, a better option to buy a dream house is, with a home loan. Home loans have an easy application process and flexible repayment tenures. At Kotak Mahindra bank, enjoy competitive home loan interest rates and low processing fees. For easy initiation of loan application and clarity on any aspect, Kotak’s expert can offer assistance.

Additional Read: Top 5 Smart Ways for Buying and Selling House at the Same Time

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.