ABCD of Wealth Tax

You might be surprised about listening to the terminology of wealth-tax. Most of us by now are fully conversant with the theme of income-tax and really we understand that if we make money, then we are required to start parting with a portion of the money by way of income-tax payment. But surely payment of wealth-tax might be a new discovery for you and perhaps you may not be interested to understand too much about the Wealth-tax law because when we talk of wealth-tax, it implies some payment of tax on our wealth.

However, do not worry but please try to understand the meaning of wealth-tax, the exemption limit of wealth-tax and the items on which wealth-tax is payable. In the initial stage please do remember that wealth-tax is a separate tax other than income-tax and also other than service tax and the same is payable by individuals, Hindu Undivided Families and the Corporate Sector. Other than these categories of tax payers wealth-tax is not payable by other categories of tax payers in India.

In income-tax we are aware that the basic income-tax exemption limit for individuals is Rs. 2 lakhs which means that if you have income up to Rs. 2 lakhs, you are not liable to make payment of income-tax, Similarly, in the Wealth-tax Law the basic exemption limit is Rs. 30 lakhs. This means that there is no liability to payment of wealth-tax if you have got a taxable wealth up to Rs. 30 lakhs. With the growing savings and accumulation of great wealth in your name or in the name of your client you might be worried that in most cases your wealth will be exceeding Rs. 30 lakhs and that if you are called upon to make payment of wealth-tax, you may not feel too very happy but please do remember that a large number of assets owned by you fall outside the purview of wealth-tax and thus, with happy note you can now come to a conclusion that wealth-tax is not payable on the entire wealth you are having in your name but the wealth-tax is payable only on selected assets belonging to you.

The list of the assets in respect of which wealth-tax is payable are enumerated in section 2(ea) of the Wealth-tax Act, 1957. For ready reference we print hereunder the specified assets which alone are liable to wealth-tax as mentioned in the said Wealth-tax Act and here is the list :-
a) Any guest house; residential house; commercial property; and/or farm house situated within 25 kilometres from the local limits of any municipality or a cantonment board; but excluding;

• A house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole-time employment; (A) having gross annual salary of less than Rs. 10,00,000; (B) having gross annual salary of less than Rs. 5,00,000 [upto assessment year 2012-13],

• Any residential house forming part of stock-in-trade,

• Any house for commercial purposes (i.e., commercial property) which forms part of stock-in-trade,

• Any house which is occupied by the assessee for the purposes of any business or profession carried on by him,

• Any residential property that has been let-out for a minimum period of 300 days in the previous year, and

• Any property in the nature of commercial establishments or complexes;

b) Motor cars, other than those used in assessee’s hiring business or used as stock-in-trade;

c) Jewellery, bullion, and 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, other than those used as stock-in-trade by the assessee;

d) Yachts, boats and aircrafts, other than those used by the assessee for commercial purposes;

e) Urban land, being land situated in any area, within the jurisdiction of a municipality or a cantonment board which has a population of not less than 10,000; or within 8 kilometres from the local limits of such municipality or a cantonment board, as the Central Government may notify.
However, urban land shall not include:

• Land on which construction of a building is not permissible under any law or the land on which building is constructed with the approval of the appropriate authority,

• Any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him, and

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

• Cash in hand, in excess of Rs. 50,000 of individuals and Hindu undivided families and in the case of other persons any amount not recorded in the books of account.

Thus, from the above mentioned list you can come to the conclusion that not all your assets come within the mischief of tax liability under the Wealth-tax Act. It is only the selected assets which come within the purview of Wealth-tax Law. To make it simple please do understand that generally speaking your residential properties, motor cars, jewellery are some of the most important items on which wealth-tax is payable.

However, when it comes to real estate, please do remember that one house property in any case is fully exempt from wealth-tax. Moreover, if you are having more than one house property but these properties are in the form of commercial properties, then again there is no liability to wealth-tax irrespective of the number of properties you own. If your love is towards making investment in residential properties and that you have got more than one residential property in your name, then if you have given these residential properties on rent for a minimum period of 300 days in a year, then also there is no liability to wealth-tax in respect of such properties.

We have discussed in the above paragraphs certain important assets which alone are liable to wealth-tax but all your other movable assets like bank balances, Fixed Deposits, shares of companies, debentures of companies, bonds of companies, loans to friends, relatives, loans to any party, Mutual Funds etc., etc., are not at all liable to wealth-tax. Thus, for most of the individual tax payers this exemption will prove so very handy as they will not be required to make payment of wealth-tax because of innumerable wealth-tax exemptions. Also do remember that there is no wealth-tax liability on the insurance policies owned by you.

For all those persons who are liable to make payment of wealth-tax, they have to compulsorily file yearly Wealth-tax Return. However, it may be noted that the Wealth-tax Return is to filed only when the net taxable wealth is in excess of Rs. 30 lakhs. For example if a person is having jewellery worth Rs. 10 lakhs, shares worth Rs. 50 lakhs, bank Fixed Deposit of Rs. 30 lakhs and a very big house, even then he is not liable to payment of wealth-tax because the entire quantum of shares and FDR as also one house are completely exempt from wealth-tax and thus, his taxable net wealth-tax happens to be only Rs. 10 lakhs for which there is no liability to wealth-tax. Hence, it may be remembered that all those persons who have got wealth exceeding the exemption limit have to file Wealth-tax Return every year after the close of the financial year.

The last date of filing Wealth-tax Return is exactly like the Income-tax Return. There is a separate Wealth tax Return form required to be filled up for filing Wealth-tax Return. The tax payer is required to make payment of Self Assessment Wealth-tax before filing the Wealth-tax Return. However, the happy news is that no Advance Tax is liable to be paid with reference to your liability to Wealth-tax. The payment of Wealth-tax is at the rate of 1 per cent of the taxable wealth. Once you understand your obligations to pay and file the Wealth-tax Return, then you have no other hassles and problems in dealing with the matters relating to Wealth-tax.

Subhash Lakhotia

Subash Lakhotia is a Tax and Investment Consultant and Tax Guru in CNBC Awaaz.

The views expressed in this article are the author´s own.