Beyond Taxes: How Small Cities Can Build Their Own Revenues
Why does a city’s own income matter? This commentary looks at how small cities can strengthen their own-source revenue and gain greater flexibility to fund the priorities their residents need.
Why does a city's own income matter?
Running a city costs money and the source of that money influences who is in charge.
Most small cities depend heavily on money sent from the State and Union government to pay for water, street lights, drains and garbage collection. This money sometimes comes late or comes with strings, and often needs to be spent on what the scheme allows it to be spent on, rather than what the city needs.
Money the city raises itself through property taxes, or user charges on water/waste collection, in policy jargon is called ‘own-source revenue’ or ‘OSR’ for short. OSR gives the city more control and flexibility to decide how to spend its earnings. Unlike central or state grants, OSR is untied money that the local council can allocate directly toward urgent local priorities and day-to-day maintenance without waiting for higher-level approvals. It also makes the city government answerable. When residents pay, they have a stronger claim to ask where the money went. Finally, a strong OSR baseline can improve a city’s financial health, making it easier to unlock co-funding, meet state matching-grant requirements, and over time build the creditworthiness required for institutional financing.
Smaller cities earn much less on their own, than bigger ones, per resident and as a share of their total budget. A national study found that in 2017-18 a municipal corporation raised about four times as much per person as a municipal council, and more than six times as much as a Nagar Panchayat. According to a Rajya Sabha reply by the Ministry of Housing and Urban Affairs, OSR made up just 27 percent of total revenue in small cities (under one lakh people), against 62 percent in cities with a population of over 10 lakh people. Smaller municipalities also account for only a small share of all the own revenue raised by India's cities, while municipal corporations account for most of it.
Unlike central or state grants, OSR is untied money that the local council can allocate directly toward urgent local priorities and day-to-day maintenance without waiting for higher-level approvals. It also makes the city government answerable. When residents pay, they have a stronger claim to ask where the money went.
Why does it matter, and why now?
The Sixteenth Finance Commission (FC-16) has now tied part of the grants that it allocates for city governments to the amount of revenue a city generates on its own.
20 percent of the Finance Commission grants have become a performance grant. Starting in 2027–28, a city qualifies for this performance grant only if its own tax and fee collections grow by at least 5% over the previous year, or have matched a steady 5% yearly increase since 2025–26.
Money that cities fail to earn goes to better-performing cities in the same state. The Centre will keep sending money, but increasingly to cities that show they are raising some themselves.
This is a hard target for a small city that is still struggling to survey its own properties. When the previous Finance Commission required cities to rapidly grow their property tax collections, the number of states claiming the grant fell from 22 to 16, since most cities with populations under one lakh people could not meet this property tax growth target.
Five questions to ask before choosing a revenue idea
While property tax remains the traditional backbone of municipal income, overhauling it takes years of surveying and enforcement capacity that small towns rarely have. Fortunately, user fees, asset rents, and service charges already make up over a third of what cities raise on their own. Ideas for earning city income can come from anywhere: big-city programmes, other small towns, and things a city already does without realising that there may be a hidden revenue strategy.
These five questions below can tell a small city whether a new idea will work there. City government officials and elected representatives can work through them in order (if an idea does not align with an early question, it doesn't need the later ones).
1. What does the city already have that could earn?
Many small towns own fewer buildings, plots and rights, so they can start with the inventory list of what the city currently holds. It could be a market, a lakefront, a busy road, a plot beside a bus stand, or a service it already runs. The city can draw up the list from the city's property, estate and engineering records. Councillors can add what the records miss, since they know their wards: an unused plot or a pond.
2. Does the State allow it, and in what form?
State rules often decide whether the city collects the money itself, shares it with the state, or is left out altogether. The city can check this with the state urban development department or directorate of local bodies, and analyse the municipal act and the city's own bye-laws. If the rules block a good idea, the elected head and councillors are the ones who can press the state to change them.
3. Can the city's own staff run the initiative?
Small city governments often lack capacities such as contracts, collection and forecasting. The commissioner/executive officer can assess this with the city's revenue, engineering and accounts staff, and set out what outside help or shared state support is available. The council can decide whether to hire, outsource or ask for support, and approve any contract.
4. Will the money count towards FC conditions, and will it keep coming?
Ask two things once the city has identified an own source of income:
Will it count? The FC grant test looks strictly at earnings that are shown in the city’s revenue accounts. Borrowed money (such as loans or municipal bonds), expenditure savings, and shared state taxes are not own revenue. However, the borrowed rupee can fund a new facility, but only the user fees or rents that facility generates will count toward the 5% growth tests.
Will it last? The test is applied every year. A one-time payment, such as an upfront fee for a lease, helps the city in the year it is earned, but the city must still stay on track the next year. Income the city government can earn that repeats each year is a better option to see a sustainable growth in OSR.
5. Can the revenue survive market slumps or seasonal changes?
Advertising and tourist charges may rise and fall with the economy and the season, so a city may not want to build its core budget around them. The finance department/officer can bring local data on tourism, traffic and advertising, and the city's own record of past collections. Councillors can bring what traders, hoteliers and residents say, and the council can decide how much to rely on the income and what to do if it falls short.
Small cities have their own advantages. A hill town can charge visitors in a way an inland town cannot, and a highway town has more to offer telecom companies. Residents can start by asking their ward councillor: "What does our city own, and what could it fairly earn from it?
What have cities tried?
Advertising on city space (hoardings, poles, walls)
Of all the advertising fees cities collected across India in 2021-22, about 61% went to the largest cities, 30% to mid-sized ones and 9% to small cities (Janaagraha, Municipal Reforms Blueprint, Fig 2.19). Hoarding income also depends on how much businesses choose to spend on outdoor ads, which is beyond a city’s control. It is a useful extra for a small city, not something to build a budget on. The first step is to list the walls, poles and sites the city already owns, and check that existing rights are priced fairly and re-auctioned when they expire.
Leasing land for mobile towers and fibre cables
In Goa, a telecom company applies to a state authority, which grants permission and collects the fee, and the state then passes on a share to the municipality, for example to Panaji (population of 40,000 people in the 2011 Census). The city does not control the process, and the money may be counted as shared revenue rather than its own. In Kerala, by contrast, operators need separate permission from each local body. The city collects and keeps all the fees as its own revenue, but absorbs all the inspection and administrative workload. Within this source, there is also an emerging constraint: central telecom policy is pushing states to treat this infrastructure as a service rather than a revenue source, which could shrink the income.
Running parking and bus-terminal assets.
Chandigarh, a mid-sized city earns about ₹2.42 crore a year from 18 parking sites it manages itself, and is now considering auctioning 21 sites in Sector 17 to a private contractor, with a reserve price of ₹3 crore. Running an asset in-house keeps the income with the city, but it takes staff to do it well. A council must weigh the trade-off of direct management versus handing it to a contractor.
In Mohali, a terminal with shops was meant to earn from bus fees, leases, parking and advertising. By 2017 it was getting only about 200 buses a day against about 2,000 expected, as users and drivers kept using an older bus stand to avoid the fee. The Tribune reported that most buses passed through without stopping, and that the authority had begun ending the contract. It was a project of the development authority and the state government.
In Amritsar, run by the Punjab transport department, some bus operators avoided the fee by operating from outside the terminal. The authority then required all intercity buses to use it, but no one monitored or enforced the rule, so it had limited effect.
In Dehradun, the contract promised the development authority (not the city) a fixed annual lease of ₹81 lakh, rising 5% a year after four years. The planned shopping complex was never built, after disputes over maintenance and lease payments.
Bus terminals built with private partners have had a poor record, and the three examples, though a bit dated and from mid sized cities, were state or development-authority projects, not municipal ones. The World Bank lists Mohali, Amritsar and Dehradun as "challenging cases".
The lesson is that a new facility earns money only if people actually use it, and whoever signs the contract has to be able to enforce it.
Charging visitors.
Many hill towns are working through visitor charges right now. In Himachal Pradesh, Manali already charges a green tax on vehicles from outside the state, and Shimla's municipal corporation has green tax proposals awaiting state approval. The new Solid Waste Management Rules, 2026, in force since 1 April 2026, may let local authorities at busy tourist destinations charge tourists a waste management fee. The amount and how it would be collected have not been decided.
Visitor charges can suit hill towns and tourist spots, but they depend on state approval, clear rules on what is charged where, and visible use of the money, so that residents and visitors accept them.
Turning waste into compost
Selling compost can bring in direct revenue while cutting dumping and transport costs. In Ambikapur, Chhattisgarh (population about 2 lakh), women's self-help groups run waste collection and processing for the municipal corporation. In 2022-23 the system earned about ₹3.5 crore, of which about ₹40 lakh came from compost, ₹1.25 crore from dry waste and ₹1.83 crore from user charges. It also avoided ₹50 to 60 lakh a year in landfill costs. We could not find the corporation's financial statements, and published accounts differ on whether the corporation or the cooperative holds this income. So we cannot say whether it counts as the corporation's own revenue. The point for other cities is to settle this question before relying on the income.
Municipal bonds
A bond is a loan, not revenue. When Nashik raised ₹200 crore through an AA+ rated green bond in March 2026 for its water supply, the borrowed money did not count toward its own earnings-only the water charges it collects from the new network will.
For small towns, borrowing directly from the bond market is rarely feasible alone. However, predictable local revenue is what makes borrowing possible in the first place. The 16th Finance Commission highlights pooled financing-where several small towns bundle their projects into a single joint bond backed by the state—as a way forward. Raising reliable local revenue may not just help a city clear the Finance Commission’s 5% test; it can also prove the city has the financial health to borrow and build the assets it needs.
What these examples teach
None of these ideas are new, and none of them is a recipe to copy. Each one succeeded or struggled because of one or more of the five questions above. Small cities have their own advantages. A hill town can charge visitors in a way an inland town cannot, and a highway town may have more to offer telecom companies. Residents can start by asking their city governments: What does our city own, and what could we fairly earn from it?
Moving ahead
A lot of the above doesn’t require smaller cities to invent anything. These examples are partially well documented, even if public information may be limited. State urban development departments, which license and set the rules cities operate under, are well placed to share the legal and technical support small cities need to run these ideas. City based officials are the only ones who can judge which ideas fit their city's own assets, and elected representatives can decide which are worth the trade-offs given citizens' priorities.
Raising revenue this way won't make a small city self-reliant on its own. But it can build something longer-lasting than a single grant cycle: a city with more than one source of income, and a little more room to decide its own development.
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