In India, most people focus all their tax planning skills on working out how to save taxes on their income. They invest in 80C instruments, buy tax-free bonds, keep meticulous track of capital gains. But if you’re an HNI you need to know about the other direct tax that all of us are subject to — wealth tax.
Income tax is payable on the income that you earn regularly, whereas wealth tax is payable on your assets, the same assets you buy with your income after shelling out income tax.
How it’s computed Wealth tax is computed on the market value of all the assets you own. You need to pay it whether or not they yield any returns. Tax laws say that every individual and Hindu Undivided Family whose net wealth (assets less liabilities incurred to acquire the assets) exceeds ?30 lakh is required to pay wealth tax.
Net wealth is the value of all assets (that are chargeable to wealth tax) held by an individual on the valuation date in excess of the value of all debts incurred in relation to these assets.
The tax, based on the value of the assets as on March 31, is levied at the rate of 1 per cent of the amount that exceeds the ?30-lakh limit. Therefore, wealth tax will be applicable on an asset even if purchased at the fag end of the year. Assets sold during the year escape the levy.
Some of India’s Double Taxation Avoidance Agreements (DTAAs) provide relief from double taxation for wealth tax as well. So, if you have paid wealth tax in any other country, you can expect some relief.
Who is liable? Residential status is key to deciding wealth tax liability. The thumb rule is that resident Indians are subject to wealth tax on their global assets, while non-resident Indians and foreigners are liable to pay tax only on their assets located in India.
NRIs come under the ambit of wealth tax on assets held here. But if a non-resident returns to India to reside here, the assets brought in by him or her are not liable to wealth tax.
Assets acquired by an NRI from the money brought in within one year of his or her return are also exempt. This exemption holds good for a period of seven years after the return to India, says Section 5(1)(v) of the Wealth Tax Act.
Which assets? Wealth tax is payable on assets such as real estate and bullion owned by the investor as well as on deemed assets such as those owned by a spouse. Assets such as shares, securities, mutual funds and fixed deposits, which are generally termed as ‘productive assets’, are exempt from wealth tax. Though there is a long list of items such as yachts, boats, aircraft, among others, that are subject to wealth tax, the assets commonly owned are real estate, jewellery and cars.
Home: One residential home is exempt from wealth tax, while ownership of more than one house will attract wealth tax liability. But if a property is used to conduct business or if it forms a part of stock-in-trade or has been rented out for at least 300 days in a year, wealth tax is not applicable on such property.
Vehicles: Tax is levied on the market price of the car, except where it is used in a car hiring business.
Jewellery: Ornaments made of gold, silver, platinum, bullion or any other precious metal and precious or semi-precious stones are subject to tax. This includes precious gems sewn into clothes or set into furniture. Further, cash-in-hand in excess of ?50,000 is also subject to wealth tax.
Lastly, if you are liable to wealth tax, transferring the assets to your spouse will not help. Assets gifted to a spouse, a minor child or a son’s wife will be, notwithstanding the gift, deemed to belong to the taxpayer himself or herself.
Checks and balances Currently, as it is mandatory to quote PAN (permanent account number) for all financial and property transactions, it is easy to link all Indian transactions of an individual.
The income-tax provisions require residents and those ‘ordinarily resident’ to disclose foreign assets (that is, immovable property, other assets, bank accounts and financial interests) in their tax return.
Online filing of tax returns and computerisation of tax records make detection and prosecution a simple affair. Maintaining a statement of assets owned by an individual will go a long way in simplifying your wealth-tax filing.