February 21 , 2013
Unlike income tax, which is charged only on your income in a particular year, Wealth Tax is charged on the value of total assets you own, year after year. It is imperative to understand what makes something part of the 'wealth' tag, how much tax is to be paid to the government on your wealth, how and when to pay wealth tax and filing wealth tax returns. The Wealth Tax Act deals with taxation on wealth.
Wealth tax applicability
Assets like financial securities that are used to generate income do not fall under the purview of Wealth Tax. Broadly all other assets like property, cash, jewelry, vehicles attract wealth tax. Wealth tax is charged on your net wealth exceeding Rs 30 lakhs. Now what is net wealth? It would mean the value of all your assets coming under wealth tax after deducting any loans paid till date to acquire them.
Wealth tax focuses on 'unproductive' assets- such as a vacant plot of land, a house lying vacant, jewellery beyond what you wear, etc. So wealth tax would apply on movable and immovable properties including
- Urban land, residential house, commercial house, guest house or farm house (if within 25 km of municipal/cantonment limits)
- Car, boat, yacht, aircraft
- Jewelry, furniture, utensils or any articles having gold, silver, platinum or other precious metals/stones in them
- Cash over Rs 50,000
However even some of these can be excluded from the wealth tax net if you make them comply with one of the exemptions.
Wealth tax exemptions
Wealth tax assets do not include shares, mutual fund units, bonds, Gold Deposit Scheme and such financial securities used for generating income. Besides the list of exclusions include
- One house or plot of land having area less than 500 sq mts (no restriction on no. of plots)
- House/s used for your profession or business
- Any residential property that has been let out for at least 300 days in a year
- Vehicles used for hiring purpose
- Any other asset used as business stock-in-trade
This implies that irrespective of how many houses you have you can escape the wealth tax net by renting them all out. Similarly as long as vacant plots of land are less than 500 sq mts you will not be liable to pay wealth tax on them.
Wealth tax rate
Wealth Tax is charged at 1% on net wealth over Rs 30 lakhs. For instance if your net wealth is Rs 80 lakhs you need to pay Rs 50,000 as wealth tax.
Computing wealth tax
If you own more than 1 house and if it is not let out, it might drag you into the wealth tax net. You are free to choose which house you want to claim exemption on. Ensuring that your residential homes are let out will keep you out of wealth tax.
Assets that you transfer to your wife, child or other persons without taking adequate payment for them will also be considered as part of your net wealth.
Schedule III of Wealth Tax Act lays down rules for valuation of assets that are charged under wealth tax. Valuation of property is based on rent it has received or might have been received. For assets like jewelry are valued at market rate. Any amount of loan you have taken to acquire property, jewelry or other assets being considered can be deducted from the value of assets. For computing value of assets 31st of March is to be taken as valuation date.
Since TDS does not apply on wealth tax, you have to proactively pay wealth tax through challan no ITNS 282.
Wealth tax on foreign assets
If you are an Indian citizen or PIO who lived abroad and have returned to settle in India your assets brought from abroad will not be charged for wealth tax. Wealth tax exemption on foreign assets is available for a period of 8 years from the year of return. Any assets you acquire with money brought from abroad or money in your NRE account on the date of valuation also get this exemption.
Wealth tax return
Wealth tax return is to be filed along with Income Tax returns. According to the law everyone whose net wealth exceeds Rs 30 lakhs is liable to file wealth tax returns. It is filed through Form BA. More on wealth tax returns is covered in a separate article.