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Wednesday, March 06, 2013

What is Wealth Tax in India

Background
Most people believe that paying their taxes diligently and timely will help them to get a good night's sleep and so, they discharge their tax liability year after year by paying income tax on time. However, many taxpayers remain ignorant about paying another form of tax -- which is charged on the assets gathered by them over time. Known as the wealth tax, it is the less famous sibling of income tax, which is payable on the wealth accumulated by individuals over the years. As it is an additional tax, it is levied over and above the income tax.

Why Wealth Tax?
While income tax is payable on the total taxable income earned by an individual in one year, wealth tax is paid on the possession of certain assets which fall under the Wealth Tax Act of the Indian taxation system. A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets (a change in stock). Wealth tax is a direct tax levied on the ownership of certain assets by individuals and Hindu Undivided Families (HUFs) even though these assets may not generate any income. It is governed by the Wealth Tax Act, 1957.

Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following :-
a) Individual
b) Hindu Undivided Family(HUF)
c) Company

Can i ignore Wealth Tax?
Penalties related to ignorance of wealth tax are much more severe as compared to that of income tax. Remember that ignoring wealth tax can lead to serious problems for a taxpayer, with the penalty ranging from 100% to 500% of the unpaid tax, and in extreme
cases, even jail.

 
What is Taxable? 
The assets which are taxable under the Wealth Tax Act are:
1) Residential property other than one house
2) Guesthouse
3) Farmhouse
4) Cars (unless used for commercial hiring)
5) Precious metals including those in the form of jewellery
6) Gold
7) Air crafts, yachts, boats
8) Urban land
9) Cash in hand in excess of Rs 50,000.

In addition to these, all assets transferred by individuals to their minor children and to a spouse for inadequate consideration also attract wealth tax.

What is exempt from Wealth Tax?
Following assets are exempt from the purview of Wealth Tax:
a) any one residential property
b) commercial property
c) financial assets like shares, mutual funds, debentures.
d) any outstanding loan taken to buy the asset.
e) any residential properties which are rented for at least 300 days in a year. Remember that the rental income from such property is counted under Section 24 as "Income from House Property" and taxed under Section 24.

In India, the extent of taxable wealth for individuals differs with their residential status. For resident Indians, net taxable wealth will include all assets in India and abroad whereas for non-resident Indians, net taxable wealth includes only those assets which are in India.

When does one come under Wealth Tax purview?
Wealth tax is paid when an individual's net taxable wealth minus his/her total outstanding debt on all such assets (that are eligible for wealth tax) is more than Rs 30 lakh, as on valuation date (March 31 of a financial year).

How much is the tax?
It is levied at 1 per cent of the net taxable wealth exceeding Rs 30 lakh.
So, if your net assets are 50 lacs as on the valuation date of a particular financial year, you need to pay 1% wealth tax on 20 lacs (amount exceeding Rs. 30 Lacs), which comes out to Rs. 20,000/-

Filing DeadlineJust like Income Tax, Wealth tax return has to be filed by 31 July. You have to use the four-page Form BA for filing the return.

Pay your wealth tax on time and avoid huge penalties later.

Cheers

Manoj Arora

3 comments:

  1. This is the perfect article one should read to get information about wealth tax.You have explained it such a way that even person from non financial background can understand it.

    Income Tax eFiling

    ReplyDelete
  2. Very nicely written. How to put a value on jewellery we own? Does the jewellery brought by spouse at the time of marriage, and owned by her, also to be shown as one's wealth, considering spouse is also an IT returns filer with proper PAN? Thanks.

    Shankar.

    ReplyDelete