How is one Affected by Wealth Tax?
One has heard the famous saying “Wealth is the ability to fully experience life”. After the wealth is garnered when it is time to sit down and enjoy it a familiar problem comes along. Taxes or in this case wealth tax. ” In this World nothing is certain but death and taxes”. One neglects wealth tax as he believes the Government does not seriously pursue this cause and one believes he can escape without paying the wealth tax. The consequences of not paying wealth tax are severe. One would be punished with a hefty fine or in extreme cases even imprisonment. Still think one should neglect wealth tax?
What is wealth tax?
Wealth tax is levied on what are non productive assets. One may own assets such as gold or a car used for personal consumption. One may have two or more properties which are locked up and not given on rent. Such wealth is deemed non productive to the economy and there is no economic benefit for the society at large from these assets. Wealth tax is a taxation levied on one’s non productive assets if their market value exceeds INR 30 Lakhs. One is charged tax at the rate of 1% on the market value of the assets which exceeds INR 30 Lakhs. Any outstanding loan such as a home loan is deducted before wealth tax is computed. The valuation date for wealth tax is 31st March of the financial year. One needs to file his wealth tax returns every year before July 31st. If wealth tax is computed for the period of April 1st 2012 to March 31st 2013 then it needs to be filed before July 31st 2013.One may have to pay a fine at the rate of 1% on the tax due for every month of delay. Penalty could be as high as 500% of the amount due and even a jail term up to 7 years if the tax evaded exceeds INR 1 Lakh.
What are the assets on which one has to pay wealth tax?
- Gold and ornaments
- Art, paintings, furniture, utensils and artifacts.
- Aircrafts and Yachts
- Cash in hand in excess of INR 50000
- Motor cars and luxury watches
- More than one property which is not let out
- Urban land
- Assets transferred to one’s spouse or minor children which come under the purview of wealth tax without adequate consideration are added to ones wealth and wealth tax is charged. Even if gifted the same rules apply.
Which assets are exempt from wealth tax?
- Commercial property
- Outstanding loan taken to purchase an asset on which wealth tax is payable.
- Fixed deposits, shares, bonds, savings bank account balance, ulips, mutual funds, Gold ETF are viewed as productive assets and no wealth tax is charged on them.
- Property held for stock in trade and stock in trade held for business purposes including jewellery as stock in trade do not attract wealth tax.
- One’s residential property.
- One gives his second house on rent for over 300 days in a year.
- One is allotted a house by his employer which is not subject to wealth tax provided he earns less than INR 5 Lakhs per annum excluding perquisites but before standard deductions.
- House or land which does not exceed 500 square meters is not charged wealth tax.
- House held for business and profession.
- Property held under a trust.
- Residential building and gold jewellery of a former ruler used as a heirloom.
- Resident Indians are charged wealth tax on worldwide wealth. NRI’s pay wealth tax only on Indian assets and not their worldwide assets.
- If one is an Indian or a PIO returning permanently to India money and assets brought from abroad will not be charged wealth tax. If one acquires assets with money within a year immediately preceding the date of his return and any time afterwards in this period no wealth tax is charged on these assets. One does not have to pay wealth tax on the funds in his NRE account which is in any bank in India.
How is wealth tax calculated?
Mr Ramesh has assets of Gold and ornaments, luxury watch, paintings, Second house not given on rent, motor car and cash in hand as shown in the table below. He also has an outstanding home loan liability as shown. How much wealth tax does he need to pay?
Table showing Mr Ramesh assets and liabilities :
|Gold and ornaments
|Second house not rented
|Outstanding loan for the house
|Cash in Hand
- Mr Ramesh adds all his assets shown in the table
- M Ramesh subtracts his home loan liability.
- Total assets Mr Ramesh has are INR 50 Lakhs.
- Wealth tax basic exemption is INR 30 Lakhs and 1% is charged for amounts exceeding this value.
- Mr Ramesh is charged wealth tax at (5000000 – 3000000) =INR 20 Lakhs
- This value is charged tax at 20 Lakhs @ 1% = INR 20000.
How is one’s house property subject to wealth tax?
- One’s residential house is not subject to wealth tax.
- If one has a second house and he uses it for business or a profession, rents it out for a period of at least 300 days in a year or it is a part of stock in trade then it is not subject to wealth tax.
- If one has a second house which does not satisfy the above conditions then it is subject to wealth tax.
- If one has two houses then the house with the higher valuation or gross annual value is chosen as the residential house and the lower valuation house is subject to wealth tax. This saves on tax.
- If one has two houses and his parents reside in one of them then rent is collected from his parents and this token rental income is taxed. One can escape wealth tax through this route only paying tax on the rental income obtained from his parents which is much lesser. At the end of the year one returns the amount to his parents as a gift, as gifts from children are not taxable If one has a loan outstanding on his house then the rental income can be set off against the interest component of the home loan up to any amount.
There is a famous saying “ Taxes grow without rain” .One needs to beware of his tax liability and make sure that all dues are paid on time to avoid paying more than what is due as a penalty. One needs to study his wealth tax and pay it on time. Remember always pay your wealth tax on time.