There's income tax and then there's the little brother - wealth tax. Here's a primer on how NRIs must deal with their wealth tax obligations.
If you are a Non Resident Indian with net wealth from assets in India aggregating more than Rs 30 lakh in a financial year, you may be liable to pay wealth tax. The reason I say 'may be' is because you may get the benefit of certain exemptions. So let's take a look.
What are assets?
- Urban Land (that is, non agricultural land)
- Residential or commercial property
- Jewellery, bullion, furniture, utensils and any other article made wholly or partly of gold, silver, platinum or any other precious metal
- Cars, Aircrafts, Yachts
- Cash in excess of Rs 50,000 (this is cash in hand and not in the bank)
Only if these assets are located in India would you fall under the purview of Wealth Tax in India.
Any of these assets acquired through gift inheritance will also be considered as assets for Wealth Tax purpose. While the ownership of land, property and vehicles are easily determined with title documents, in the case of gold, Sanjiv Chaudhary, Partner - KPMG explains, "There are no specific criteria for deciding the ownership of gold under the Wealth Tax Act. Hence on a general basis, if you have purchased the gold and you are legal owner, it will be considered as your asset. If it has come through gift or inheritance then you will be considered as the legal owner because it your property."
Assets also include those assets that are transferred to the spouse, minor child or wife of son without adequate consideration. So if you have gifted property to your spouse or transferred property in the name of your minor child or in the name of your son's wife, without any consideration, the asset will be considered to be held by you for Wealth Tax Purpose.
Chaudhary adds, "In case an asset is held by an individual's minor child, such asset shall be included in the wealth of the parent. If a minor has earned on account of any manual work done by him or any activity involving application of his skill, talent or specialised knowledge and experience it shall not be included in the wealth of the parent."
What is not included in assets?
If you hold any of the above assets as stock-in-trade, they will not be considered your assets for Wealth Tax purposes. So if a developer holds apartments that he proposes to sell, they will not be considered assets for the purpose of Wealth Tax.
Financial assets such as bank balance, stocks, mutual funds, bonds and deposits are not included in assets.
Additionally, a property which is given out on rent for at least 300 days in a year is not considered to be an asset.
What is net wealth?
Net wealth is the aggregate value of all the above assets minus any loans taken in order to purchase these assets. So if you have taken a home loan to purchase a property, the outstanding value of the loan will be reduced from the value of the property while arriving at net wealth.
Another important inclusion to net wealth is Interest in Partnership. If you are a partner of a firm in India, the value of your interest in the assets of the firm will be included in your net wealth.
Wealth tax is then calculated at the rate of 1% over and above the limit of Rs 30 lakh. While income tax is a tax on the income earned in a particular year, wealth tax is a tax on the value of assets held in a particular year. So if you sell a property before the 31st of March of a financial year, you would not have to include that asset while calculating wealth tax. But the gains from the sale would be included in income tax.
How are assets valued?
There are different valuation mechanisms for each asset. In the case of property, a multiplier factor is applied to the net rent. In the case of jewellery, value of jewellery shall be estimated to be the price which it would fetch if sold in the open market on the valuation date. If the value exceeds Rs 5 lakh a report of a registered valuer must be attached. In case of all other assets, the Assessing Officer may conduct the valuation himself or refer the valuation to a Valuation Officer.
Valuation can be a complicated and tedious process and it would be best to consult a professional for this.
"Your chartered accountant should be able to help you with these details," says Sandeep Shanbhag, Director, Wonderland Investments and an expert in NRI tax and finances.
Are there exemptions?
Yes. Any property that is given out on rent for at least 300 days in the year is exempt from Wealth Tax.
So suppose you are an NRI and own 2 properties in India. One property is given out on rent for the entire year and the second one is vacant. Says Chaudhary, "The property which is let out for the full year will not be considered as an asset. The vacant property can be claimed as exempt under the provisions of the Wealth tax Act." Therefore, neither of these properties will be considered while arriving at the net wealth threshold of Rs 30 lakh.
What about NRIs returning to India?
NRIs returning to India with the intention to stay on permanently have some concessions with respect to Wealth Tax. Explains Chaudhary, "The exemption is available only to an Indian citizen or to a person of Indian origin who was ordinarily residing in a foreign country and has returned to India with the intention of permanent stay. In case of such individual, any asset brought by him or any property acquired out of the money brought by him within one year immediately preceding the date of his return and at any time thereafter, shall be exempt from wealth tax and such exemption shall be available for a period of 7 successive years starting from the date of his return."
How should NRIs file Wealth Tax Returns?
The due date for filing wealth tax returns is the same as the due date for filing income tax returns, that is, 31st July. Unfortunately for NRIs, there is no facility to file your Wealth Tax returns online. However, the return can be signed by a person holding due power of attorney in India.
The penalty for filing wealth tax returns is 1% per month from the due date.
Currently, the Wealth Tax provisions are fairly loosely administered. However, the upcoming Direct Tax Code (DTC) appears far more aggressive on the Wealth Tax front. Chaudhary explains, "The Direct Taxes Code ('DTC') Bill, 2010, proposes many changes both favourable as well as adverse for NRIs. DTC proposes to expand the definition of specified assets. While the existing assets have been retained, additional assets covered for individuals are as under:
- Archaeological collections, drawings, paintings, sculptures or any other work of art;
- Watches with a value in excess of Rs 50,000;
- Bank deposits outside India;
- Any interest in a foreign trust or any other body located outside India (whether incorporated or not) other than a foreign company;
- Any equity or preference shares held by a resident a Controlled Foreign Company;
- Cash in hand in excess of Rs 2 lakh (as against existing limit of Rs 50,000)
DTC also proposes to retain the existing the rate for charging wealth tax at 1% while increasing the non-taxable threshold of net wealth to Rs 1 crore as against the existing limit of Rs 30 lakh."
However, the date for DTC to become applicable has not yet been finalised