Wealth tax is a direct tax (that is, the tax is paid by the person on who it is levied), just like Income Tax. In India, wealth tax is managed and regulated under the Wealth Tax Act, 1957. Similar to income tax, the wealth tax is also assessed on an annual basis. As the name very well indicates, wealth tax is a tax levied on the net wealth (that is, wealth excluding debts) of an assessee. The income producing potential, or whether the asset is actually producing an income or not, is not relevant for the purpose of wealth tax assessment. In other words, if an ownership is established, then the owner of the asset is liable to pay wealth tax on the asset.
What is Wealth?
Since wealth tax is imposed on the net wealth of an individual, it is important to understand the meaning of wealth in the context of the Wealth Tax Act. Wealth can be understood as the monetary value of all the assets owned by the assessee, or the person who is being assessed for wealth tax. The monetary value of the assets will be the market value of assets on the date of tax assessment.
This brings us to the next question, which is -
What are Assets?
The Wealth Tax Act specifically defines the following as assets for the purpose of wealth tax assessment -
- Building/land situated within 25 km of the local limits of a municipality – whether used as a residence, guesthouse, farmhouse or for commercial purposes
- Automobiles for personal use ( e.g., the cars in a taxi fleet would be exempt)
- Precious items, such as jewelry, bullion, precious stones, utensils etc.
- Aircraft, boat, yachts etc used for personal purpose
- Plots/lands situated in urban area
- Cash in hand in excess of Rs 50,000.
To plug certain loopholes, the following items are deemed assets for the purpose of wealth tax assessment -
- Spouse owned assets, or transferred from one spouse to another
- Assets owned by minor children
- Assets transferred by a person to another person or association of persons (AOP) without adequate consideration
- Assets transferred to another person under a revocable transfer
- Assets transferred in the name of sons’s wife, or for her benefit.
The following items are exempt assets, that is ,they will not be assessed for wealth tax calculation -
- One house held for residential purpose, by an individual or an HUF
- Residential buildings/palaces of former rulers
- Jewelry, classified as heirlooms, owned by former rulers
- Property held by a trust for religious and/or charitable purpose (this exemption is obviously highly misused)
- Any assets owned by an expatriate, on return to India, for a period of 7 years.
- Productive assets such as shares, bonds, investments, bank deposits and mutual funds.
Who is Liable to Pay Wealth Tax?
The Wealth Tax Act specifies that the following ‘persons’ are liable to be assessed under the Act -
- An individual (and those falling under the 1 by 6 criteria)
- An HUF
- An association of persons (AOP) or a body of individuals (BOI)
- A company
- Any non-corporate identity whose accounts are statutorily audited
In the case on an individual, the amount of wealth tax liability will depend on the fact whether the said individual is a citizen or a non-citizen of India. For resident citizens, all assets situated abroad will be included, while for resident non-citizens, only assets situated in India will be assessed.
Wealth Tax Rate
Any wealth owned by an assessee in excess of Rs 15 lakhs will be charged at the rate of 1%. In other words, wealth is exempt from wealth tax up to a limit of Rs 15 lakhs. With effect from the assessment year 2010-11, this limit has been raised to Rs 30 lakhs.
For detailed laws, bye-laws, rules, regulations and procedure regarding wealth tax in India, please refer to the website of Income Tax Department.