WEALTH TAX - AN OVERVIEW
My client started investing in assets such as motor cars and jewellery, thinking this would get him out of the tax net. But were you aware that such assets are also subject to tax? Like my client, most people tend to focus only on income-tax and are unaware of the fact that actually there is yet another direct tax that all of us are subject to, i.e. wealth tax.
The basic difference is that income tax is payable on income whereas wealth tax is payable on wealth. Wealth constitutes the assets you buy with your income after paying income tax.
This is charged for every assessment year in respect of net wealth of corresponding valuation date, inter alia, on every individual, Hindu Undivided Family (HUF) and company at the rate of 1% of the amount by which net wealth exceeds Rs. 30 lakhs. Net Wealth is the taxable wealth, which in turn is derived from aggregation of value of all assets (excluding exempted assets) belonging to the assessee on the valuation date - which is March 31st of the previous year including assets required to be included in the net wealth, is in excess of the aggregate value of all debts owed by the assessee on the valuation date which have been incurred in relation to the taxable assets.
Essentially, wealth tax is a tax on the value of the assets owned. Wealth tax is to be paid on the market value of the assets year after year, whether or not such assets yield any income. Every individual and HUF whose net wealth (assets less liabilities incurred to acquire the assets) as on March 31 exceeds Rs 30 lakh is required to pay wealth tax at the rate of 1 per cent, of the amount that exceeds the limit. Therefore, wealth tax will be applicable on the asset even if it is purchased at the end of the year. Conversely, those assets sold during the year and consequently not held as on March 31 escape the levy of wealth tax.
Every individual, holding assets in India, the value of which exceeds the threshold limit shall come under its ambit. This means that even NRIs come under the realm of wealth tax. However, NRIs are not subject to wealth tax in respect of the assets held outside India unless they qualify to be residents of India. Also, if an NRI returns to India with the intention of permanently residing here, the assets brought in by him or her will be exempt. Moreover, the money and the assets acquired from the money brought by an NRI within one year after his or her return shall be exempt. This exemption is available to an NRI for a period of seven years after his or her return to India according to section 5(1)(v) of the Wealth Tax Act.
Wealth tax is payable on assets such as real estate and bullion owned by the assessee as well as on deemed assets such as those owned by a spouse, a minor child and so on.
Consequently, assets such as shares, securities, mutual funds and fixed deposits, which are generally termed as 'productive assets' are exempt from wealth tax. Though there is a long list of items such as yachts, boats, aircrafts, among others, that are subject to wealth tax, as of now, we shall consider only those assets that are commonly owned, such as real estate, jewellery and cars.
One house is exempt from wealth tax. In other words, ownership of more than one house will attract wealth tax liability. There are three exceptions. If a property is used to conduct business or professional activity, or if it forms a part of stock-in-trade or has been rented out for at least 300 days in the year, wealth tax is not applicable on such property.
Tax in this case would be applicable at the market price of the car. However, there are exceptions in cases where the car is used in a car hiring business.
Jewellery, in this case, includes ornaments made of gold, silver, platinum, bullion or any other precious metal and precious or semi-precious stones. Such items even if sewn into clothes or set into furniture have to be considered for wealth tax purpose.
Further, cash in hand in excess of Rs 50,000 is also subject to wealth tax.
Lastly, if you find yourself liable to wealth tax, merely transferring the assets to your spouse will not help. Clubbing provisions similar to those applicable in the income tax law are also applicable in the case of wealth tax. Therefore, any asset gifted to a spouse, a minor child or a son's wife will be, notwithstanding the gift, deemed to belong to the taxpayer himself or herself.
Scope of Wealth Tax
Incidence of tax in the case of an individual depends upon his residential status and nationality, the residential status is decided as per Income Tax Act.
Following are the intricacies of this act:
Assessment for citizen of India and resident in India, a resident-HUF and company resident in India.
Wealth tax is chargeable on net wealth comprising of:
a. All assets in India and outside India.
b. All debts in India and outside India are deductible in computing the net wealth.
Assessment for citizen of India but non-resident in India or not ordinarily resident in India, HUF, non-resident or not ordinarily resident in India and a company non-resident in India or an individual who is not a citizen of India whether resident, non-resident or not ordinarily resident in India.
a. All assets in India except loan and debts interest whereon is exempt from income-tax under section 10 of the Income-tax Act are chargeable to tax.
b. All debts in India are deductible in computing the net wealth.
c. All assets and debts outside India are out of the scope of Wealth Tax Act.
Section 5 of Wealth Tax Act suggests certain exemptions for Wealth Tax, the same is mentioned below -
a. Property under a trust or under some legal obligation of any purpose of a religious or charitable nature in India subject to the fulfillment of certain conditions.
b. Interest of a coparcener in any HUF property.
c. Single residential building of former Ruler.
d. Jewellery of a former ruler (other than personal) or as a heirloom accepted by CBDT or the Central Government before 1st April, 1957.
e. Assets of Indian repatriates for seven years on fulfillment of prescribed conditions.
f. One full or partial house or a plot of land (with effect from 1st April, 1999) belonging to a HUF or individual who is free from Wealth Tax.