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Pagdi rent system - 101
What if we told you that you could live in South Bombay and pay a rent of Rs. 500. Would you believe me? Well, you can. Read to know more.
Imagine you live in a prime location in Mumbai like Colaba or Worli, facing the sea, surrounded by high-rise buildings, and maybe even spotting a celebrity every now and then. Like a dream, isn’t it? Now imagine the rent you would have to pay for such a property. Insane amounts obviously! But what if I told you that in some pockets of Mumbai and India, a traditional tenancy model exists where the tenants pay a nominal amount of Rs. 500-1000 AND also partially own the property? Believe me.
It’s called the Pagdi rent system.
So what is this unbelievable deal, I mean the Pagdi rent system?
The Pagdi rent system is a traditional tenancy model in India which started under British rule. Some sources state that this system was started as a way to bypass existing laws that did not allow property owners to lease or sell parts of a building (like a single room) to a buyer or a tenant. To circumvent this, owners started the Pagdi system.
How does the Padgi rent system work?
Imagine it’s 1965 and a certain Mr. Darius Mistry owns a flat in Colaba and wants to sell it to Mr. Kishore Kumar, who is interested in buying it. Under the Pagdi rent system, Mr. Kishore will pay a lump sum amount which is referred to as Pagdi, and also pay a nominal rent which is usually below Rs. 1000 per month. Pagdi refers to turban in Hindi and also implies a sense of honour that the person receives in return. Let’s also assume that the previous tenant of this property was Mr. Ashraf Malik.
The lump-sum amount that Mr. Kishore will pay to buy the house will be divided between Mr. Darius and Mr. Ashraf in the ratio of 65:35 (think of this as paying to all parties who have skin in the game). Today the lump-sum amount is in sync with the market value of the rental property and is favorable for the landlord ( which is normally about 80% of the value of owning property in the same locality).
But a couple of decades ago the lump sum amount would be a few multiples of the ongoing rent. So if the rent was Rs. 100, the cost of the flat could be a hundred times the rent i.e. Rs. 10,000 (peanuts for a SoBo flat, right?). But that’s how the system worked. Today, these flats have changed multiple hands and the tenants are still paying a small amount as rent. In most cases, the padgi and the rent are paid in cash as the owners prefer it that way (read possibly for tax evasion).
So now, the original landlord is making money from his asset, the old tenant has received a substantial amount before moving out and the new tenant has got co-ownership of the property at a lower than market price with a nominal rent to the landlord.
Are you wondering - if Mr. Kishore bought this flat, then why is he paying rent? Well because under the Pagdi system, Kishore and Darius now have co-ownership of the property with specific terms and conditions. To sum it up, Mr. Kishore enjoys a lower monthly rental (which could be Rs. 100 in 1965 and Rs. 500 in 2021) and also has co-owns the property.
As a co-owner of the property, Mr. Kishore has the right to sub-lease or sell the property after an agreed-upon time period (anecdotes say after 5 years). However, in the case of sub-letting, the preceding tenant and the owner share the rental income at a 35:65 ratio.
Whereas in the property sale, the owner takes 30-50 percent share of the proceeds, and the remaining belong to the tenant. This provision not only ensures profits to the owner but also reduces tax implications. This kind of lop-sided rental design is obviously not competent for expanding the rental market but that’s beyond the scope of this explainer.
Does this system still exist?
Yes. In multiple smaller markets of Mumbai and Delhi the Pagdi rent system is still practiced. In fact in Mumbai, some of the prime areas of the city have properties that have massive occupancy of pagdi tenants.
But is it legal?
Yes, As per the Maharashtra Rent Control Act of 1999 which came into effect from March 2020, the Pagdi rent system was made legal.
Ok, so what does this mean from a household finance perspective for a family living in urban India under the pagdi system?
As of 2019, the average rent across the six metro cities is ₹15,600 per month. Comparing this with a household that lives in a flat inherited under the pagdi system and pays a monthly rent of Rs. 500, ends up with a much higher surplus despite living in a prime area. The chances of eviction are very low as the act protects tenants from eviction on unfair grounds.
But not everyone staying in such properties have a smooth financial life. In one of our previous user research interviews, we interviewed a person living in Mumbai in a property that’s under the pagdi rent system. Given his salary of Rs. 5 Lakh per annum, he can be categorized in the middle-income category.
We asked him about his living conditions. These are some excerpts from the interview-
D91: We would like to discuss your expenses in some more detail...do you pay Rent?
Rajeev: We have what is called the Pagdi Rent System running here. Although we have been staying here for 50-70 years, we pay the owner Rent. The rent is around Rs 400 - 500 inclusive of maintenance. Earlier it was Rs 300 but they increased it recently, saying they have some problems.
D91: Why did you buy a second house?
Rajeev: The house I am currently staying in belongs to my father. It is occupied by a joint family in which we are included. You should have a place of your own. We are 3 brothers. If there is an argument or a misunderstanding, it’s good to have a place of your own. So we took a place in Virar. We got a 1 room kitchen for 18 lacs.
D91: Where did you take the loan from?
Rajeev: I took the loan from SBI
D91: You took this loan in 2015 and you have to repay it in 18 years?
Rajeev: I have to do it within 18 years but in the last 15 years I have only managed to save 2 lacs. Now there’s a big headache about how I am going to repay this loan. Everything is going above my head. I am paying Rs 1,80,000/ year and since 2015 but how much have I paid really. If I had my own money to put in, it would all have been finished now. After taking this loan, things are going in reverse...there is a saying - ‘ your salary is half a rupee but your expense is 1 rupee’ - my situation is like that. This loan is giving me a lot of grief. I pay Rs 14,000 on it every month. If I could have kept that money at home and used it, it would have been so good. These days I have been thinking - Where do I get the money from? It's driving me crazy. We got the house for 18 lacs but with the interest on the loan, it is costing us 30 lacs. I have been thinking that I really have to put together some money to clear this loan quickly.
Here’s an overview of his annual expenses. To recap, his annual income is Rs. 5 Lakh and his annual expenses sum up to Rs. 4,92,720.
Quite evidently Rajeev’s family is not really benefiting from additional household surplus from living in a house under the pagdi rent system. But yes, if his rent was as high as the properties in his proximity, he won’t have been able to afford living here, and nor would he avail the network effects (jobs, schooling, standard of life). When evaluating a household’s financial situation, it is important to get a 360-degree view of their lives, experiences, and culture.
The Pagdi system sounds like a very lucrative deal from far, but as you move closer it’s a complicated and messy system to be entrapped in. In reality, the tenant is uncertain about being at the mercy of the landlord and has no visibility about the terms and conditions agreed upon by the previous generation of tenants. The buildings under this system are usually not well maintained and there’s a constant conflict among tenants and landlords to bear costs related to repairs and maintenance. It’s the lure of prime location that families don’t want to forgo.
For a low to middle-income household, there is an accidental benefit of lower rent under Pagdi system, but would you trade mental peace for the illusion of financial certainty.
Tandel, V., Patel, S., Gandhi, S., Pethe, A., & Agarwal, K. (2016). Decline of rental housing in India: the case of Mumbai. Environment and Urbanization, 28(1), 259-274.
All illustrations designed by Prajna Nayak
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