The Pagdi System in India & Latest Changes: All You Need to Know

When it comes to the process of renting a home, we know the basics. You find a place, you pay a monthly rent, as well as a lump-sum deposit that is fully or partially refundable once to decide to stop renting the place and move out. The rent amount from place to place differs across states and cities but is more or less similar. But in cities such as Mumbai, Kolkata, and Delhi, the Pagdi System has been one of the longest-standing practices, even pre-Indian Independence – and right back to the British Raj. Even today, there have been over 7.5 lakh Mumbai homes that have rental agreements under the Pagdi system law. But what is the Pagdi system in Mumbai? How does it differ from our existing renting system that isn’t Pagdi? To simplify the system as well as the legal updates, we explore in this blog everything you need to know about the Pagdi system. 

What is Pagdi System?

Introduced for the purpose of evading taxes paid to the British government before India’s independence, the Pagdi-kiraydar system had a significant role to play during the transfer of property. Under the Pagdi system sale of property or even tenancy, the tenants become a partial owner of the premises and not of the land, while continuing to pay rent to the owner. The tenant also gets the right to sell the property, wherein he or she pays a certain substantial amount of 30-50% of the total amount of the sale to the owner/property owner. As per Section 56 of the Rent Control Act of 1999 in fact, this is a consideration paid to the property owner as a premium, fine, or ‘Pagdi’, authorising the tenant to receive any amount for the consideration of transferring or relinquishing their rights of tenancy. Similarly, the property owner or anyone acting on behalf of the property owner/owner can receive a fine, premium, or similar ‘pagdi’ for the renewal, grant, or lease of the premises, or even for giving his or her consent of the transfer of tenancy rights in pagdi system to anyone else. 

Given that the concept was introduced in the pre-Indian independence era, the rules were inclusive of the ownership rights of pagdi system tenants, including:

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• There are no leases or agreements between property owners and tenants
• The tenants have certain rights over the property but not the land of the property
• Tenants can sublet the property by themselves under certain conditions
• The tenant has the right to sell the property upon mutual agreement with the property owner and he/she has to share a certain part of the profit with the original owner, i.e., the property owner

Essentially the pagdi agreement format ensured that the rent for the tenant to pay was nominal throughout the years and did not weigh the financial stability of the tenant. At the same time, due to the newer process of paying a deposit and rent in India, you may have a situation in South Mumbai where the Pagdi system is prevalent for example, where some tenants are still paying a rent of Rs. 800 per month while others are paying >20,000 per month for similar property size.

Pagadi Meaning and Pagdi System Redevelopment

The Pagdi system is a unique form of tenancy prevalent in Mumbai and other parts of Maharashtra. Under this system, tenants pay a lump sum amount to the landlord, known as the pagdi, and then pay a nominal rent for the property. The pagdi represents the tenancy rights of the tenant and can be passed on to their heirs or sold to another person.

One of the significant challenges of the Pagdi system is redevelopment. Many of the properties under the Pagdi system are old and dilapidated, and redevelopment is necessary to ensure the safety and well-being of the tenants.

However, the redevelopment process in the Pagdi system can be complicated, with issues related to ownership, tenancy rights, and compensation. The Maharashtra Rent Control Act, 1999, lays down the procedures for redevelopment in the Pagdi system.

At NoBroker, we offer a range of real estate services, including property management and legal assistance, to help landlords and tenants navigate the complexities of the Pagdi system and ensure a smooth redevelopment process.

Pros And Cons of the Pagdi System

As mentioned before, one’s tenancy rights under pagdi system are different from the typical renting process. If you as a tenant had purchased a ‘tenancy right’ under the Pagdi system, you are a partial owner of the rented property. This means if the original owners choose to sell the building with its land to a new real estate developer, you as a tenant will be given a substantial percentage of the current sale amount to vacate the premises. So, if you paid Rs. Eight thousand to rent a place in 1950 for example, and it is sold for Rs 40 lakhs in 2023, you will be eligible to receive somewhere between Rs 11-20 lakhs to move out. This transfer of tenancy rights in the Pagdi system is a huge benefit for the tenant, as it is a capital asset, and you can save tax on such long-term capital gains by reinvesting in a new home. It is also a benefit for you as a tenant if you don’t want to move out, as you would be paying a much, much lesser rent than others in the same area for the same property size. The property owner also gets to benefit from the transfer of ownership in the Pagdi system as he/she gets additional rights on half of the area which needs rehabilitation and therefore recovers the cost of new construction, as well as shares in the profits. 

While the pros or advantages of the Pagdi system rules are clear, there has been quite some issues because of it as well – the most vital one being the redevelopment of real estate properties. As per the old system, the redevelopment rules for the Pagdi system have been very unclear as once the properties are constructed and completed, the part-owner drops the responsibility of maintenance on the tenant who is also a co-owner. With such a low amount that the renters receive in the modern-day, the maintenance work gets ignored, and properties’ structures become dishevelled, often leading to casualties repeatedly. While the need for affordable housing was a key reason for the Pagdi system in the era of the Second World War, redevelopment needs have created unfamiliar problems for both tenants and property owners, and therefore recent changes in the legal structure. This is why the state government and tenants have also pushed for a new law for the Pagdi system under the Maharashtra Rent Control Act of 1999, so that slowly can move towards the newer and progressive Model Tenancy Act, instead of an archaic system from almost a century ago. There have also been efforts to bring the Pagdi system act under the new RERA model. But what will the Pagdi system ownership rules under RERA look like? Let’s find out. 

Pagdi Properties: Can Landlords Kick Out Tenants on a Whim?

In the Pagdi system, landlords cannot evict tenants arbitrarily. They can only do so for specific reasons allowed under the law. The following are some of the reasons for which a landlord can evict a tenant in the Pagdi system:

• Non-payment of rent by the tenant: If the tenant fails to pay the rent on time, the landlord can initiate eviction proceedings against them.

• Subletting of the property: If the tenant sublets the property without the landlord's permission, the landlord can evict them.

• Illegal activities: If the tenant engages in illegal activities on the property, the landlord can evict them.

It is important to note that the landlord must follow the due process of law when evicting a tenant. They must serve a notice to the tenant and follow the procedures laid down in the Maharashtra Rent Control Act, 1999.

At NoBroker, we understand that the eviction process can be complicated and stressful for both landlords and tenants. That's why we offer a range of real estate services, including property management and legal assistance, to help landlords and tenants navigate the process smoothly.

Passing on the Pagdi Property: Who Gets to Call the Shots?

In the Pagdi system, the ownership of the property and the tenancy rights are intertwined. The following are some of the scenarios in which the transfer of ownership and tenancy rights can take place:

• Inheritance: If the original tenant passes away, their heirs can inherit the property and the tenancy rights.

• Sale: The tenant can sell their tenancy rights to another person. However, the landlord has the right of first refusal, which means they have the option to buy the property before anyone else.

• Redevelopment: In case of redevelopment, the landlord can offer alternative accommodation to the tenant in the new building. The tenant can choose to accept or decline the offer. If they decline, the landlord must pay them compensation.

It is important to note that the transfer of ownership and tenancy rights in the Pagdi system can be complicated and requires legal expertise. At NoBroker, we offer legal assistance to help landlords and tenants navigate the process smoothly.

Inclusion Of Pagdi System Under RERA

Under the Maharashtra Rent Control Act of 1999, the state government of Maharashtra allows for some benefits including an additional discounted FSI or FloorSpace Index for developers volunteering to take on the redevelopment of properties under the Pagdi system rules in Mumbai. As per the Brihanmumbai Municipal Corporation or BMC’s guidelines set forward in 2018, tenants living in non-cessed buildings before June 13, 1996, are the ones eligible for getting new flats if the property they are living in is being redeveloped. As per the laws, A building is considered to be cessed if it pays a tax or cess that goes into a repair fund. Private landowners are in charge of these buildings, which are subject to Bombay Rent Control Act regulations. The majority are in the south and central Mumbai, where the buildings of the pre-Independent India era. Similarly, a non-cessed building means a property isn’t paying taxes for repair or maintenance. Additionally, as per the incentivising programs by the DCPR or Development Control and Promotion Regulations, if a developer takes up the redevelopment of 2 to 5 Pagdi properties, the FSI incentive can go up to 60-70%. All of the above are great initiatives to ensure that housing is not only affordable for existing tenants and the Pagdi system landlord rights are secure, but more affordable housing development projects are encouraged by the government. 

At the same time, more plans to secure the Pagdi system to ownership are in process. The government, for example, is planning to take the cessed and dilapidated buildings under the Pagdi system in Mumbai law and bring them under the RERA Act of 2016 so that the same level of protection to tenants is also available for Indian homebuyers. Given that taxes for such buildings are direct to the MHADA or Maharashtra Housing and Area Development Authority, the onus of redeveloping such properties will also be with MHADA, which means that there will be fewer chances of accidents and more construction standards being met. 

Latest News on Pagdi System in Mumbai

While most recent news about tenants still living in dilapidated Pagdi homes continues for unfortunate reasons, the introduction of the new Model Tenancy Act of 2021 is not something that will affect or cause any concern to the tenants living in them. As stated in a recent interview with The Economic Times, by the secretary at the Ministry of Housing and Urban Affairs (MoHUA), Mr Durga Shanker Mishra, the new law does not take the existing rental agreements under its purview. This means that even if the old act gets repealed, any existing tenancies and disputes in relation will continue to be regulated by the old laws. He also added that the new Model Tenancy Law has the potential to encourage more participation of private investors as well as to institutionalise rental housing for people – opening up the market to be worth about Rs. Three lakh crores, as well as help the national economy grow. Moreover, this also has to potential to make more than eleven million currently empty houses on rent, and therefore support the government of India’s mission towards ‘Affordable housing for all by 2023’. So far, adding the government’s ARHCs or Affordable Rental Housing Complexes under the PMAY-U or Pradhan Mantri Awas Yojana – The urban scheme has been getting good responses from both private and public entities in more than seventeen states and union territories. This will ensure that the Pagdi system tenant rights in Mumbai are not only secure but also with future benefits for others in the nation.

Know Your Rights and Get the Right Legal Counsel with NoBroker 

When it comes to legal issues and paperwork, you need to be extremely careful, even the slightest mistake could mean a huge loss. For example, getting a home loan on a property under the Pagdi System can be difficult, as many ownership issues remain prevalent with old properties. If you want property rights transferred to your name, you also need to go through a cumbersome process for the ownership rights to be established and the banks to approve your loan application. Furthermore, the Maharashtra Rent Control Act of 1999 makes it clear that any pagdi tenant’s family member staying with the deceased tenant at the time of his/her death is the first eligible from the family to be the successor in continuing the tenancy. Note that the tenancy rights are not transferable under a Will, and therefore you need to show evidence of staying with the tenant at the time of death. There are a lot of possibilities to consider, lots of paperwork to go through, and a lot of legwork – therefore a lot of odds of mistakes to occur. 

The best way to avoid such mistakes is to get a team of professionals to assist you. At NoBroker, our experts will guide you and ensure your paperwork is perfect. Or if you need help financing your new home, simply leave it to us! Here at NoBroker, we can help you get a loan at the lowest rate in the market! What’s more, we give you a dedicated Loan Manager to assist you through the entire process and ensure your loan gets dispersed within 72 hours. Click on the link below to check your eligibility and get started. If you have any questions, drop us a comment below and we will get back to you.

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