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Have you filed your wealth tax returns?
October, 25th 2007
Vikas Garg & Anand Dhelia explain how wealth tax provisions apply to you.

Every individual, who has wealth exceeding Rs 15 lakh, is required to pay wealth tax as well as file a return of wealth tax with the revenue authorities by July 31, immediately following the end of the previous year (the previous year runs from April 1 to March 31). Currently, the wealth tax rate is 1%.

Wealth, in a broad nutshell, is the value of prescribed assets of an individual as reduced by debts owed in respect of assets. Therefore, if the asset is valued at Rs 20 lakh and the outstanding loan against the asset is Rs 16 lakh, the amount that would be considered as wealth would be Rs 4 lakh.

An important point to note is that the value for the purpose of wealth-tax would be the value of the assets as on the last day of the respective previous year (i.e., March 31). There are prescribed guidelines that need to be followed for valuation of the assets.

So let us look at an example. Rajen owns the following assets as on March 31, 2007: One residential house valued at Rs 60 lakh; one motor car valued at Rs 10 lakh; a bank balance of Rs 3 lakh; shares valued at Rs 57 lakh and gold jewellery valued at Rs 20 lakh.

Would this mean that Rajen has wealth of Rs 1.5 crore and he has to pay a wealth-tax of Rs 1.35 lakh? (i.e., 1% of 1.35 crore as mentioned above, it should be noted that only wealth exceeding Rs 15 lakh is taxable).

Thankfully the answer is No! While the definition of assets covered under wealth tax is extremely wide, fortunately a description has been provided for assets that fall within the purview of wealth-tax (both covered as well as exemptions thereto have been defined).

Broadly, the following assets are considered as part of the taxable wealth of an individual: House, motor car, jewellery, cash in hand in excess of Rs 50,000, urban land (that is land situated, within the jurisdiction of municipality and having a population of 10,000 and more or in any area within such distance from the local limits of any municipality) and yachts, boats and aircraft.

Therefore, in our example, shares and the bank balance are not covered as taxable assets. In addition to this, even the covered assets enjoy certain exemptions.

Typically, the wealth tax is only applicable on non-productive assets. Thus, where the aforesaid assets are used for commercial purposes (like boats and aircraft) or held as stock for trading purposes (like jewellery and motor car), they are not liable to wealth tax. One must be careful in examining the exemptions that are available in respect of each asset.

Let us for instance, look closely at the definition of house. Your own house, in which you reside, is not an asset subject to wealth tax, nor is a plot of land owned by you provided that it does not exceed 500 sq meters. A house held as stock in trade or used for own business or profession is also exempt, as are commercial complexes. If a residential property has been let out for 300 days or more in the previous year, the same is also exempt from wealth-tax.

Therefore, in Rajens case, even the residential house is exempt from wealth tax (and only the car and jewellery are finally liable to wealth tax). After all this, Rajen would only be liable to pay wealth tax on the value of Rs 30 lakh, the wealth tax amounting to a mere Rs 15,000.

You must also note that dispersing ownership of the asset amongst family members may not exempt you from being taxed. Similar, to the income tax provisions, there are provisions for clubbing where assets transferred by an individual to his spouse, sons wife or to a person for the benefit of spouse or sons wife without adequate consideration form part of his/her wealth and not the transferees.

While resident Indians are liable to wealth tax on their global wealth, foreign citizens please note that your assets situated in India are also liable to wealth tax in India.

Authors are from Ernst and Young.
 
 
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