• Car
  • Bike
  • Taxi
  • Term Life
  • Health
  • Travel
  • Investment

Wealth Tax

Back in 1957, the Government of India decided to introduce the Wealth Tax Act upon the richer strata of society. But since the application of this tax was more expensive than the benefits derived, the act was abolished in 2015 Union Budget.

What is Wealth Tax?

Wealth Tax Act has been replaced by a surcharge of 12% upon the income of high net worth individuals, (HUFs) Hindu Undivided Family and corporates. HNIs are persons with incomes of ₹1 crore or higher and companies that earn ₹10 crores or higher.

Wealth Tax in India

As per the Wealth Tax Act, 1957, an individual, a Hindu Undivided Family or a company had to pay a wealth tax of 1% on earnings of over ₹30 lakh per annum. This tax was a levy of tax on the net wealth (the aggregate value of assets minus the aggregate value of debts or liabilities as on the valuation date) of extremely wealthy individuals, companies or HUFs at the end of a particular fiscal year.

The purpose of wealth tax was to increase the amount of direct taxes being collected from rich people in order to reduce inequality in wealth across India and ensure that these people made a larger contribution towards the revenue of India.

How is Income Tax and Wealth Tax different from each other?

The most important difference between Income Tax and Wealth Tax is that income tax is payable on the income earned in a financial year while wealth tax is tax payable on anything which is purchased with money once you have paid your income tax.

Why has Wealth Tax been abolished?

The following are the reasons why Wealth Tax was abolished in India:

  • Easier and simple taxation system: By abolishing wealth tax, the government has reduced the scope of some taxpayers taking undue advantage of the loopholes in the wealth tax act.

  • Simple tax procedures: The Indian government wanted to simplify procedures for easier tracking and enhance transparency with respect to the complex nature of Indian tax laws.

  • Expensive allocation: The cost of collecting wealth tax was much higher compared to benefits. Moreover, wealth tax does not make for a major portion of collection of direct taxes in India.

  • Increased revenue: By abolishing wealth tax and replacing it with additional surcharge, the government has collected revenue worth over ₹9000 crore since 2015.

  • Administrative burden: Every taxpayers has to value their assets as per the Wealth Tax Rules to compute their net wealth. For certain assets such as jewelry, taxpayers had to obtain a valuation report from a registered valuer which in turn increased the process of tax collection.

  • Curb widening of the tax base: The Indian Government wants to bring more persons under its tax net, given that individuals who file income tax returns outnumber those who file wealth tax returns.

  • Improved reporting: As per the surcharge system of collection, the taxpayers will have to do some additional reporting of information in their income tax returns in terms of listing out their assets and liabilities.

  • Prevents leakage: Details about assets submitted by the taxpayer in the income tax returns will help officials correlate declared wealth with the declared income. Therefore, tax officers are able to ensure that there is no tax ‘leakage’.

Impacts of Wealth Tax

As mentioned before, wealth tax has been replaced with a levy of additional surcharge. The surcharge would be applicable to the following - Individuals, HUFs, Firms, Cooperative Societies and local authorities with income exceeding ₹1 crore.

For an individual with an annual income of more than ₹1 crore and firms with an income exceeding ₹10 crore, the surcharge applicable is 15% for FY 2018-19. For corporates earning an annual taxable income between ₹1 crore to ₹10 crore, the surcharge applicable is 7% and 12% for taxable income more than 10 cr.

Wealth Tax Rules

Primarily, wealth tax rules take the resident status of an individual into consideration. All residents of India are subjected to pay wealth tax on the assets they own in India along with their global assets. With the case of NRI’s and foreigners, they have to pay wealth tax towards the assets they own in India only.

The definition of ‘assets’ has been defined by the Wealth Tax Act as:

  • Any building/ land/ apartment, whether used for residential or commercial purposes or for maintaining a guest house or otherwise. It also includes a farm house situated within 25 kilometers from local limits of any municipality or a Cantonment Board. But there exist a few exceptions when it comes to buildings, land or apartments, which are not included in this category as per the law.

  • Motor cars (other than those used by the taxpayer in the business of running them on hire or held as stock-in-trade).

  • Jewelry, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals. This category, however, is not inclusive of any of the above items held as stock-in-trade by the taxpayer.

  • Yachts, boats and aircrafts (except for those used by the taxpayer for commercial purposes).

  • Urban land (referring to the definition as per law), other than the following:

  • Land on which construction of a building is not permissible under any law for the time being in force; or Any land on which construction is done with the approval of the appropriate authority; or

    • Any unused land held by the taxpayer for industrial purposes for a period of two years from the date of its acquisition by him; or

    • Any land held by the taxpayer as stock-in-trade for a period of ten years from the date of its acquisition by him.

    • Land classified as agricultural land in the records of the Government and which is used for agricultural purpose.

Wealth Tax Exemptions/Limits

This comprises of ‘assets’ which are exempted from the list:

  • A particular house or part of the house or a plot of land (not exceeding 500 Sq. meters.) in case of Individual or HUF.

  • The interest of a person in the coparcenary property of any HUF of which he is a member or the Houses as a place of business or profession.

  • Any property held by the taxpayer under trust or other legal obligation for any public purpose of a charitable or religious nature in India.

  • Jewelry in possession of a former ruler of a princely State, not being his personal property, which has been recognised by the Central Government as a heirloom before 1-4-1957 or by the CBDT after 1-4-1957.

  • Certain assets belonging to a person of Indian origin or an Indian citizen who was residing abroad and now returning with an intention of permanently residing in India is exempt subject to certain conditions as per the law.

  • Investment in securities in the form of shares, bonds, units of mutual funds and units of gold deposit schemes.

Calculation of Wealth Tax

All individuals and Hindu Undivided Family with net wealth above ₹30 lakh were required to pay wealth tax. This means that if the total net wealth of an individual, HUF or company exceeds ₹30 lakhs, on the valuation date, a tax of 1% will be levied on the amount in excess of ₹30 lakhs.

Wealth Tax Rate

Let us understand this with an example:

The wealth tax is calculated at 1% on net wealth above ₹30 lakh. If your net wealth for the financial year is ₹50 lakh, 1% wealth tax will be charged on ₹20 lakhs.

(₹50 lakhs – ₹30 lakhs exemption = ₹20 lakhs) So, the final amount payable will be ₹20,000/- as its 1% on ₹30 lakh.

Frequently Asked Questions

What is an example of wealth tax?

Following is an example of wealth tax. The wealth tax is calculated at 1% on net wealth above ₹30 lakh. If your net wealth for the financial year is ₹50 lakh, 1% wealth tax will be charged on ₹20 lakhs. (₹50 lakhs – ₹30 lakhs exemption = ₹20 lakhs) So, the final amount payable will be ₹20,000/- as its 1% on ₹30 lakh.

Is wealth tax abolished?

Yes, the Wealth Tax Act was abolished in 2015 Union Budget by the finance minister, Mr. Arun Jaitley.

How is wealth tax calculated?

All individuals and Hindu Undivided Family with net wealth above ₹30 lakh were required to pay wealth tax. This means that if the total net wealth of an individual, HUF or company exceeds ₹30 lakhs, on the valuation date, a tax of 1% will be levied on the amount in excess of ₹30 lakhs.

Who were liable to pay wealth tax?

All individuals and Hindu Undivided Family with net wealth above ₹30 lakh were required to pay wealth tax.

Where should taxpayers furnish all the particulars which were hitherto submitted in wealth tax returns?

Including all details about assets, wealth held will be listed in the income tax returns. Income Tax authorities will administer the proposed law.

What was the main reason cited by the finance minister to abolish the wealth tax?

As per Mr. Arun Jaitley, the finance minister, wealth tax had high collection costs but a low yield. Experts, on the other hand, suggest a variety of reasons behind the move including streamlining of data, reining in black money and minimising tax evasion among others.

Read More About Tax

Leave a rating!
5.0 (4 votes)