What Is the Pagdi System in Mumbai? Complete Guide for Tenants and Landlords

The Pagdi system stands as one of India's most unique rental arrangements, where tenants pay a substantial upfront amount called "Pagdi" along with minimal monthly rent. This distinctive model grants tenants lifelong occupancy rights and the ability to transfer their tenancy to others. Predominantly found in Mumbai, this system originated during British rule and continues to shape the city's rental landscape today.

Under the Maharashtra Rent Control Act, the Pagdi system provides strong tenant protection while limiting landlord control. Recent government initiatives focus on modernizing these properties through redevelopment programs, bringing century-old buildings under contemporary housing regulations.

Mumbai's rental market shows remarkable growth, with over 2.1 lakh rental agreements registered in 2024 – a 13% increase from the previous year. The Maharashtra government has also extended lease tenure options up to 30 years, encouraging organized rental practices across the state.

History and Origin of the Pagdi System

The Pagdi-Kiraydar system emerged before India's independence as a clever method to circumvent British taxation. In this arrangement, tenants essentially become partial property owners while continuing to pay nominal rent to landlords.

When tenants decide to transfer their rights, they typically share 30-50% of the transaction value with the property owner as Pagdi. Section 56 of the Rent Control Act, 1999, legally recognizes this payment as a premium or fine, making such transactions legally binding.

This system has evolved from a tax-avoidance mechanism into a legitimate housing solution that continues to benefit thousands of Mumbai residents today.

Understanding Tenant Rights in the Pagdi System

The Pagdi system operates without formal lease agreements, creating unique tenant advantages:

Long-term Security: Tenants enjoy permanent occupancy rights, often paying remarkably low rents. For instance, some South Mumbai properties still command monthly rents as low as ₹800, while comparable market rates reach ₹20,000.

Subletting Privileges: Many Pagdi tenants can legally sublet their properties, creating additional income streams.

Inheritance Rights: Tenancy rights automatically transfer to legal heirs, ensuring family housing security across generations.

Transfer Authority: Tenants can sell their occupancy rights to third parties, often earning substantial returns on their original Pagdi investment.

Pagdi System Redevelopment: Modernizing Mumbai's Housing

Mumbai's aging building stock requires urgent redevelopment, with many Pagdi properties being decades old and structurally unsafe. The Maharashtra government has introduced comprehensive redevelopment policies to address this challenge.

Under current regulations, redevelopment requires consent from 51% of building occupants. The Development Control and Promotion Regulation (DCPR) 2034 incentivizes landlords to undertake redevelopment projects by offering regulatory benefits.

Tenant Protection During Redevelopment:

• New flats ranging from 300 to 1,300 square feet provided at no extra cost
• Additional area beyond the specified range requires tenant payment
• Alternative accommodation during construction period
• Rights preservation in the new structure

This framework ensures that modernization doesn't displace long-term residents while improving living conditions across the city.

Key Features That Define the Pagdi System

Lifetime Tenancy Rights

Pagdi tenants enjoy permanent occupancy, with rights automatically transferring to heirs. This creates multi-generational housing security rarely found in other rental systems.

Minimal Monthly Payments

After paying the initial Pagdi amount, tenants pay extremely low monthly rent that often remains unchanged for decades. This makes prime Mumbai locations affordable for middle-class families.

Transfer and Sale Rights

Tenants can monetize their occupancy rights by transferring them to new occupants, often earning significant returns on their original investment.

Limited Landlord Control

Property owners cannot arbitrarily increase rent or evict tenants, creating a tenant-favorable environment that's unusual in today's rental market.

Legal Framework and Taxation Rules

Pagdi System Laws

Tenant Protection: The Maharashtra Rent Control Act provides comprehensive protection against arbitrary eviction, making it extremely difficult for landlords to reclaim properties.

Rent Control: Landlords cannot increase rent without legal approval, often resulting in decades of unchanged rental amounts.

Redevelopment Requirements: Property redevelopment needs majority tenant consent, with builders obligated to provide temporary accommodation during construction.

Taxation Implications

Capital Gains for Landlords: Property owners must pay capital gains tax on compensation received during redevelopment, calculated according to current income tax regulations.

Transfer Taxation: When tenants transfer rights, the received Pagdi amount may attract tax liability depending on the transaction value and agreement terms.

TDS Requirements: Transactions exceeding ₹50 lakh trigger mandatory Tax Deducted at Source (TDS) obligations for buyers before payment completion.

Advantages and Disadvantages of the Pagdi System

Benefits for Stakeholders

Affordable Housing: Tenants enjoy prime Mumbai locations at fraction of market rates. A tenant who paid ₹8,000 as Pagdi in the 1960s might still pay minimal rent while the property's market value reaches ₹40 lakh today.

Mutual Financial Benefits: During property sales or redevelopment, tenants often receive ₹10-20 lakh compensation for vacating, providing substantial returns on their original investment.

Transferable Assets: Occupancy rights function as valuable assets that can be sold or inherited, creating wealth-building opportunities for families.

Challenges and Limitations

Restricted Landlord Income: Property owners receive minimal rental income for decades, creating financial strain especially during inflation periods.

Redevelopment Obstacles: Obtaining majority tenant consent for modernization projects often takes years, delaying essential safety upgrades.

Documentation Issues: Many Pagdi arrangements lack proper legal documentation, leading to disputes and complications during transfers or inheritance.

Eviction Rules: When Can Landlords Remove Tenants?

Pagdi system landlords cannot evict tenants arbitrarily. Legal eviction is possible only under specific circumstances:

Non-payment of Rent: Consistent failure to pay even minimal rent can trigger eviction proceedings.

Unauthorized Subletting: Subletting without landlord permission violates tenancy terms and may result in eviction.

Illegal Activities: Using the property for illegal purposes provides grounds for immediate eviction.

Due Process Requirements: Landlords must follow Maharashtra Rent Control Act procedures, including proper notice periods and legal documentation.

The eviction process requires court intervention and can take months or years to complete, providing additional tenant protection.

Property Transfer and Inheritance Rules

Inheritance Process

When original Pagdi tenants pass away, their legal heirs automatically inherit both occupancy rights and associated obligations. This seamless transfer ensures family housing continuity.

Sale and Transfer Rights

Tenants can sell their occupancy rights to third parties, but landlords retain the "right of first refusal" – meaning they can match any offer before the sale to outsiders.

Redevelopment Scenarios

During building redevelopment, tenants can choose between accepting new accommodation in the reconstructed building or receiving monetary compensation for vacating.

RERA Integration and Modern Regulations

The Real Estate Regulation and Development Act (RERA), implemented in 2016, has introduced transparency and accountability in India's real estate sector. RERA's 2025 updates include a one-click information feature allowing buyers to access comprehensive project and builder details instantly.

While traditional Pagdi properties predate RERA regulations, new redevelopment projects must comply with RERA requirements, including:

• Project registration and approval adherence
• Timeline transparency and penalties for delays
• Buyer protection mechanisms
• Quality assurance standards

This integration helps modernize the Pagdi system while maintaining tenant protection.

Recent Legal Developments and News

Recent developments have created uncertainty in Mumbai's Pagdi community. The Maharashtra government missed a crucial Supreme Court deadline to defend the Rent Control Act, raising concerns about potential tenant rights erosion.

Legal representatives for Pagdi tenants emphasize that approximately 30 lakh people depend on Rent Control Act protections. The government's failure to actively defend this legislation in court has sparked anxiety about future evictions and rights losses.

These developments highlight the ongoing tension between modernization efforts and tenant protection, making it essential for stakeholders to stay informed about legal changes.

Pagdi System vs Traditional Lease Agreements

Understanding the key differences helps property seekers make informed decisions:

Investment Perspective and Market Reality

For investors, Pagdi properties present unique opportunities and challenges. While initial Pagdi payments can be substantial – often ranging from ₹5 lakh to ₹50 lakh depending on location and property size – the long-term benefits include:

Inflation Protection: With rents remaining static for decades, tenants effectively receive better value over time as inflation erodes the real cost of housing.

Prime Location Access: Pagdi properties are often located in Mumbai's most desirable areas, providing lifestyle benefits that would otherwise be unaffordable.

Appreciation Potential: Occupancy rights often appreciate significantly over time, with some tenants earning 10-20 times their original investment during property sales or redevelopment.

Conclusion

The Pagdi system represents a fascinating blend of traditional housing practices and modern urban living. While it offers remarkable benefits to tenants through affordable housing and long-term security, it also presents challenges for landlords and urban development.

As Mumbai continues to evolve, the Pagdi system must balance tenant protection with the city's modernization needs. Recent legal developments and government initiatives suggest that this unique housing model will continue adapting to contemporary requirements while preserving its core tenant-friendly characteristics.

For prospective tenants and property investors, understanding the Pagdi system's complexities is essential for making informed decisions. Whether you're considering entering a Pagdi arrangement or dealing with existing rights, professional legal guidance ensures you navigate this unique system successfully.

The system's future depends on finding sustainable solutions that protect existing tenants while enabling necessary urban development – a challenge that will define Mumbai's housing landscape for years to come.

Frequently Asked Questions

What is the minimum Pagdi amount required in Mumbai?
Pagdi amounts vary widely based on location and property size, typically ranging from ₹5 lakh to ₹50 lakh in prime areas.

Can Pagdi tenants be evicted for non-payment of rent?
Yes, but only after following due legal process under the Maharashtra Rent Control Act, which can take months or years.

Do Pagdi rights automatically transfer to children?
Yes, Pagdi tenancy rights automatically transfer to legal heirs upon the original tenant's death.

Can landlords increase rent in Pagdi properties?
Rent increases require legal approval and are heavily regulated, often remaining unchanged for decades.

What happens during building redevelopment?
Tenants receive either new accommodation in the redeveloped building or monetary compensation for vacating.

Are Pagdi transactions taxable?
Yes, Pagdi transfers may attract capital gains tax, and transactions above ₹50 lakh require TDS deduction.

Can Pagdi tenants sublet their properties?
Many Pagdi arrangements allow subletting, but this depends on the original agreement terms with the landlord.

Is the Pagdi system legal under current Indian law?
Yes, the Pagdi system is legally recognized under the Maharashtra Rent Control Act, 1999, though it faces ongoing legal challenges.