A Comprehensive Guide On Wealth Tax In India
The wealth tax was previously imposed on the super-rich section. However, the government abolished this tax through the Union Budget of 2015. This was mainly because the cost of recovering the wealth tax was significantly higher than the tax amount received. The removal of wealth tax (effective from FY2015-16) also contributed to the simplification of the tax structure.
The following sections will provide a detailed rundown of wealth tax and various aspects associated with it.
Wealth Tax: Who is Liable to Pay?
Wealth tax was a direct tax that super-rich individuals, companies and HUFs had to pay. The super-wealthy segment of the country included individuals with an annual income of more than Rs. 1 crore and companies with income that is more than Rs. 10 crores.
However, the residential status played a crucial role in the applicability of wealth tax.
Resident Indians had to pay wealth tax on their overall global assets. On the other hand, NRIs had to pay the tax on the total assets they held in India.
Wealth Tax Rates
In case the net wealth of an individual, a company or an HUF was more than Rs. 30 lakh on the date of valuation, then there would be a tax of 1% on the amount that was in excess of Rs. 30 lakh. For instance, if the net wealth of an individual stood at Rs. 50 lakh, then they had to pay a tax of 1% of Rs 20 lakh (Rs. 50 lakh – Rs. 30 lakh), that is Rs. 20,000.
Taxpayers with more net wealth than the said limit had to file a return of their net wealth. The last date for furnishing such a return was similar to that of the IT return.
Assets Covered under Wealth Tax
The following components of wealth qualified as assets and were considered when computing wealth tax:
- Any land appurtenant or building that that one uses for residential or any other purposes but doesn’t include the following:
- A house that is part of a particular stock in trade
- Any house that is allotted by an employer specifically for residential purposes, wherein the total salary of an assessee is not more than Rs. 10 lakh
- A house that the assessee occupied for professional or business purpose
- Property that is a commercial establishment in nature
- Residential property put on rent for at least 300 days during the previous year
- Any bullion, jewellery, utensils, or furniture made either partly or entirely of precious metals such as gold, platinum, silver or others
- Vehicles, other than ones put on hire or held as stock
- Urban land in a particular area, other than the following:
- Land that is classified as agricultural land or used for agricultural purposes
- Land on which construction of a building is not permissible
- A land that includes a building that was constructed with proper approval from relevant authorities
- A land which the assesses held as stock in trade for 10 years from its date of acquisition
- Land that the assesses held for industrial purposes for 2 years from the date of its acquisition
- Boats, yachts or aircraft, other than the ones used commercially
- Cash in hand that is more than Rs. 50,000
About Deemed Assets under Wealth Tax
Apart from the above-mentioned assets, deemed assets also qualify for taxation under wealth tax. Deemed assets are assets that do not belong to an assessee but are included in the assets during the computation of net wealth. Such assets include the following:
- Those transferred to spouses, but not while under an agreement of living separately
- Assets that were transferred for the wife of the assessee’s son
- Assets that were transferred to an association of persons for the benefit of the assessee or their spouses
- Those assets that belonged to minor children apart from the ones that were not acquired using skills of a minor or any asset that belongs to a minor with a disability
- Self-acquired property which was converted into a family property, or was transferred without adequate consideration
- Any asset of a firm in which the assessee, who is a partner, has an interest
- An impartible asset of an assessee
- A building that an assessee obtains through a homebuilding scheme
- Any building for which the assessee has acquired rights
- A building in which a person has the right to retain/take possession
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Assets not Eligible for Wealth Tax Computation
These assets did not qualify as wealth and were not part of the wealth tax computation:
- Any property that is under a trust and is for charitable or religious purposes
- Jewellery that is not a personal property
- Any interest in a coparcenary property of an HUF
- A house/part of a house or plot that is not more than 50 square metres in area (in the case of an HUF or an individual)
- Money or asset that is bought by any person of Indian origin
Reasons for Abolition of Wealth Tax
These are some of the main factors that led the government to put an end to wealth tax:
Tax simplification
The Indian taxation system is quite complicated and is prone to litigation. Experts say that the government removed wealth tax to simplify the taxation process and thereby enhance transparency and easy tracking.
Massive cost for collection but low yield
The government collected only Rs. 1,008 crore as wealth tax for FY 2013-14 even though there had been a significant rise in super-rich individuals. The expenses of wealth tax collection had been surprisingly higher than the tax amount.
Reduction of taxpayers’ burden
For wealth tax, a taxpayer had to opt for asset valuation as per guidelines of wealth tax for tax computation. This contributed to an additional burden for taxpayers.
Increased revenue
The government abolished wealth tax and replaced it with an additional surcharge. This has enabled it to collect around Rs. 9,000 crore in a financial year.
Tax compliance
Reports suggest that taxpayers filing IT returns are much more than those who filed wealth tax returns. The government aims to bring more individuals under its taxation.
Ensuring reduced tax leakage
Details of assets that a taxpayer submits in the IT return will help tax officials to easily correlate the declared net wealth with regard to the declared income. With this, officials can ensure that there is absolutely zero tax ‘leakage’. Previously, assets such as jewellery could not be tracked easily, which let assessees hide such disclosures while making wealth tax returns.
Low awareness
Many taxpayers in the country were fully aware of wealth tax. Naturally, many taxpayers received notices from the government for failing to pay wealth tax on time. Reports suggest there were only 1.15 lakh wealth tax assessees in FY2011-12.
Final Word
While the wealth tax has been removed, the government has increased the surcharge. As a consequence, super-rich taxpayers will now have to pay more taxes. The government is hopeful this will lead to increased tax collection.
Frequently Asked Questions
Ans: Wealth tax has been replaced by an increase in the surcharge. The government has hiked the surcharge rate by 2% to 12% for wealthy taxpayers earning above Rs. 1 crore and firms earning over Rs. 10 crore. For companies with annual income between Rs. 1 crore and Rs. 10 crores, the surcharge stands at 7%.
Ans: You have to pay income tax on the income that you earn throughout the year. However, wealth tax is payable on the net wealth or asset that you have bought along with your income. Wealth tax is a direct tax. However, the government has removed it from FY2015-16.
Ans: As per then Finance Minister Arun Jaitley, the main reason for the removal of wealth tax was low tax yield as compared to higher expenses for tax collection. However, experts have suggested a few more factors behind this move. Such factors include reducing tax evasion, bringing more taxpayers under the tax net, zero tax leakage, simplification of taxation laws and more.
Ans: With the abolition of the wealth tax, there has been a change in the process of furnishing details of assets that were provided when filing wealth tax returns. Taxpayers, henceforth, have to provide information on assets in their income tax returns. The government has made necessary modifications to income tax return forms.
Ans: According to the IT Act of 1961, the following entities were free from paying wealth tax:
Any co-operative society
Companies with registration under Section 25 of the Companies Act
Political parties
Social clubs
Reserve Bank of India
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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