How to Understand Wealth Tax?

Posted in Investment By Sajhyadri Chattopadhyay - Feb 15,2023
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In India, wealth tax is a type of tax that the government imposes on its citizens, calculated as a specific percent of your net wealth, i.e., the total value of all your assets, up to a certain threshold. Your assets consist of your investments, the property you own, like houses and cars, and of course, your total money.  

The main purpose of imposing this tax is to reduce wealth inequalities among citizens. The provisions of this tax are decided according to the Wealth Tax Act of 1957. Wealth tax is an important and useful source of revenue for the country. It does not affect the common man or put them under pressure; instead only high net-worth individuals (HNI) have to pay this tax.  

What are the Basic Provisions of the Wealth Tax?

Wealth tax is levied only on the following persons and categories in India –  

  • Individuals; 
  • Hindu undivided families (HUF);  
  • Companies. 

Any person or entity not falling under these three does not have to pay wealth taxes.  

Although a partnership firm is not liable to pay wealth tax, the assets under a partnership firm are taxed as they belong to the company’s partners. Thus, they are charged under the context of ‘interest in partnership firm’. This effectively means that the value of all assets owned by a partnership firm is to be calculated first. Then this value will be shared among all the firm partners. They, in turn, are charged the wealth tax.  

However, a different taxing scenario arises when a minor is brought on as a partner with the company and is liable to equal benefits like other partners of the firm. The value of the assets falling under the minor’s share will be considered part of the net wealth of his parent/guardian. They will be charged wealth tax based on this value.  

Similarly, a collective of people – excluding those forming a co-operative housing society – is not liable to pay any wealth tax. But the assets of such an association will be split between all the members equally and is considered as their ‘interest in partnership firm’. The wealth tax will be levied on this total value of wealth.  

Who Does Not Have to Pay Any Wealth Tax? 

The following bodies are not required to pay wealth tax in India –  

  1. Any company that is registered under the Companies Act of 1956 (Section 25); 
  2. Co-operative societies and social clubs; 
  3. Political party active in the country; 
  4. Mutual Funds specifically mentioned under section 10 (23D) of the Income Tax Act (1961); 
  5. The Reserve Bank of India.  

What is Exempted from Wealth Tax? 

There are a number of assets that are exempted from wealth tax (known as exempt assets) –   

  • Any investment securities owned; 
  • Houses or plots of land up to 500 sq. mt. in area; 
  • Buildings or houses that have been purchased for some business or profession; 
  • Residential properties which have been rented for at least 300 days within a single year; 
  • Vehicles that are used for hire;  
  • Business assets related to stock-in-trade.  

How is Wealth Tax Calculated?

Wealth tax is charged on the total wealth on a person’s total wealth owns when its value exceeds ₹30 Lakhs. All eligible individuals and companies will have to pay 1% of this amount. The valuation date for wealth tax is the last date of every financial year, i.e., 31st March.  

How Does Wealth Tax Vary with Residential Status? 

Besides their wealth and assets within the country, Indian citizens may also own assets abroad. Whether such assets can be taxed or not will be determined on the basis of their location as well as the residential status of such individuals. This will be decided in the same way as it is determined under the Income Tax Law.  

Based on the provisions of the Wealth Tax Act, the following people are subject to wealth tax based on their total assets. These include assets located within and outside India –  

  1. An Indian citizen who is an ordinarily resident individual (i.e., where they usually stay);  
  2. An ordinarily resident HUF;  
  3. A company situated and operating in India.  

Conversely, certain people have to pay wealth tax only on assets located in India. They are not liable to pay any wealth tax on their assets outside India –  

  1. Any ordinarily resident individual who is not an Indian citizen;  
  2. One who is a resident but not an ordinarily resident individual or HUF;  
  3. A non-resident of India, be it an individual, HUF, or company.  

What are the Penalties Related to Wealth Tax?  

  • A belated or revised wealth tax return can only be filed within one year from the conclusion of the assessment year or before the completion of its assessment, whichever comes earlier.  
  • Interest will be levied at the rate of 1% each month or for part of the month for any delay in filing the returns of one’s net wealth.  
  • If a taxpayer is unable to pay a part of the tax or its interest or both, they shall be considered to be an assessee-in-default.  
  • The penalty for concealing the value of one’s wealth or part of it starts from 100% and goes up to 500% of the tax they tried to avoid.  
  • Apart from levying penalties for any tax default, several laws and stipulations also provide strict prosecution for other offences like wilful attempt of tax evasion, failing to file returns of one’s wealth, failing to produce accounts or records, providing falsified verification statements verification, etc.  

How Has Wealth Tax Evolved? 

Wealth Tax was charged on people or entities who own assets of value over a certain threshold. However, the Indian Government made away with wealth tax and the provisions of the Wealth Tax Act in the Budget announcement of 2015. In its place, the government took the decision of increasing the surcharge imposed on the ‘super rich’ class. This rate was increased by 2%, taking the total surcharge levied to12%.  

Super rich individuals are those who have an annual income of ₹1 Crore or above and companies which earn ₹10 Crores or more each year. The abolition of wealth tax was a move in the right direction as it would abolish high costs of tax collection. It also helped to simplify the current tax structure in India, as well as discourage tax evasion by such super rich individuals.  

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