All about wealth tax

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What is wealth tax?

Wealth tax is a tax levied on individuals, Hindu Undivided Families
(HUFs) and companies who possess net wealth in excess of INR 1.5
million on March 31st of every year. The Wealth tax law specifies a
list of assets that will be considered to be part of the taxable
wealth of the assessee. Broadly, house property, motor cars,
jewellery, cash in hand subject to limits, urban land, yachts, boats
and aircrafts are the assets that will be liable to wealth-tax in
India. Principally, wealth tax is levied on non-productive assets of
assesses, and thus the above assets, where used for commercial
purposes, will be excluded from taxation. The current rate of wealth
tax is 1 percent on the net wealth of the assessee, exceeding the
threshold limit of INR 1.5 million.

The value of taxable assets for the purpose of wealth tax would be
their value as on the last day of the respective financial year (FY).
Further, such value of assets (except cash) will have to be determined
in accordance with the valuation norms laid down in the Wealth Tax
Act. In determining the value of the assets, debts owed by the
assessee in respect of assets chargeable to tax are reduced from the
taxable value of the assets. Thus, where you have purchased your brand
new Mercedes on 'easy monthly installments', the outstanding value of
the loan as at March 31 of the FY will go on to reduce the value of
the motor-car in the wealth tax computation. Further, while the tax
base for wealth tax is restricted to individuals, HUFs and companies;
their interest in partnership firms/ association of persons (AOP) to
the extent such firms/ AOPs possess specified assets is included in
their net wealth and subjected to tax.

Exemptions and clubbing provisions

In determining the wealth tax liability, one must be careful in
examining whether an asset is liable to wealth-tax, as there are some
exemptions that are available with respect to certain prescribed
assets. For example, wealth-tax need not be paid in respect of one
house of an individual/ HUF or on a plot of land which does not exceed
500 square metres. Neither does tax need be paid on any residential
property that is let out for a minimum of 300 days in the relevant
previous year, nor on any property which is held for business
purposes. Motor cars that are held by an assessee for running them on
hire or held as stock in trade are also not liable to wealth-tax. The
same applies to jewellery that is held as stock in trade for the
purpose of business. Other than the specified assets prescribed under
the wealth tax law, no other assets such as investment in fixed
deposits, shares or intangible property is subject to wealth tax in
India.

It is also important to note that one cannot evade wealth tax by
transferring ownership of taxable assets among family members with a
view to disperse the value of such assets which could subsequently
reduce the tax burden. When an asset is transferred to a spouse or a
minor child of the individual, or to any other person for the benefit
of his spouse or minor child, without adequate consideration, even if
the ownership of that asset does not lie with the individual, he will
be liable to pay wealth-tax with respect to those assets. Thus, the
diamonds that you gift your wife on your anniversary, besides burning
a hole in your pocket, will cause you to pay wealth tax, as the
jewellery is deemed to be your wealth.

Filing of returns

The Indian wealth tax law requires every person subject to wealth tax
in India to file a physical wealth tax return with the Income-tax
authorities by July 31 (September 30 for companies) of the year
following the FY. Another factor to consider is that while Indian
residents are liable to pay wealth tax on their global wealth i.e. on
those assets situated outside India too, but non residents including
foreign companies are liable to pay tax only on assets situated in
India.


N.Sukumar
Research Analyst