Wealth tax is levied on properties which are not used by owners. Wealth tax should be paid annually. Wealth tax calculation is based on valuation rules of assets in wealth tax act.
How to do wealth tax calculation?
Basic thing is that which asset is taxable under wealth tax act. Read my post.
So wealth tax is levied on some assets and some assets are completely exempt.
Value of taxable asset is determined by wealth tax rule.
How to calculate wealth tax on various assets?
We have to learn specific rule for determination of value of specific asset.
Valuation of building under wealth tax act :
we can calculate wealth tax on buildings by using following steps:
- Find out gross maintainable rent.
- Find out net maintainable rent
- Find capitalised value of net maintainable rent
- Add premium
- Deduct unearned increment
We will see each step in details with example so you can understand it easily:
Find out gross maintainable rent:
For let out or self occupied property, me hod for calculation of gross maintainable rent is different.
Let out property:
Higher of the following:
- annual rent
- annual value assessed by local authority.
How to calculate annual rent?
|Actual rent received|
|+ The amount of taxes paid by tenant|
|+ If repair is paid by tenant, add 1/9 of actual rent|
|+ If deposit is accepted, 15% p.a. interest should be added|
|+ premium of lease for the year|
|+ any other obligation of landlord paid by tenant|
|+ Other consideration if any received for leasing of property|
|Actual rent received|
If property is let out for part of the year, annual rent shall be calculated by using following formula:
Annual rent =
Actual rent *12/ No of month for which property is let out
Calculation of net maintainable rent:
|Gross maintainable rent =|
|Less 15% of Gross maintainable rent|
|Less The amount of tax paid to local authority|
|Net maintainable rent|
Calculation of capitalised value:
If property is constructed on freehold land ,
- Capitalized value = net maintainable rent * 12.5
If property is constructed on leasehold land,
when lease is for 50 years or more, the value is net maintainable rent (NMR)* 10
When lease is for less than 50 years, the value is net maintainable rent (NMR) * 8
Additional rule for calculation of capitalised value:
When property acquired after March 31, 1974.
If property acquired after March 31, 1974, capitalised value will be higher of the following:
- value determined by above method.
- Original cost of construction / purchase and improvement of the property.
Ignore additional original cost of construction if following conditions are satisfied :
- The house property is self occupied throughout the year.
- It is constructed after March 31, 1974.
- The cost of acquisition and improvement does not exist Rs. 50 lakhs for metro city (Bombay, Calcutta, Delhi, Madras) This limit is Rs. 25 lacks for non metro city.
- This exception is available for only one house property.
When property acquired before March 31, 1974:
For Self occupied property:
Value for wealth tax purpose should be later of following :
- Valuation as per wealth tax rule schedule III relevant for A.Y. 1971-72
- First valuation as per wealth tax rule schedule III date next following the date which he had become owner of the house.
This rule is called pegging down of value.
Let us understand additional rule with following examples.
- Assessee purchased house in Mumbai on 1/4/94 and use it as self occupied property. Cost of house is 75 lakhs and valuation as per schedule III is Rs. 66 lakhs. In this case we apply additional rule and value of house is Rs. 75 lakhs for wealth tax calculation.
- Assessee purchased house in Lucknow on 18/3/ 70 and use it as self ocuupied during previous year, We will use rule of pegging down and value as per schedule III as on 31/3/71 will be considered. (later of the 31/3/70 or 31/3/71)
- Assessee purchased house which is let out in previous year. House is purchased on 22/12/2002. Cost of house is 40 lakhs. As house is let out during the previous year we cannot ignore additional rule and value as per schedule III or 40 lakhs whichever is higher shall be value of property.
Add premium :
To calculate premium, Follow the following steps:
- Find out unbuilt area of the property
- Find out specified area
- Compare both
- If unbuilt area exceeds specified area by more than 5%, then make the addition else no need to add premium.
Find out unbuilt area:
Unbuilt area means the aggregate area of the plot of land on which the property is not constructed.
FInd out specified area:
Specified area is decided by wealth tax law. See the table:
|Mumbai, Calcutta, Delhi, Chennai||60% of aggregate area|
|Agra, Ahmedabad, Allahabad, Amritsar, Bangalore, Bhopal, Cochin, Hyberabad, Indore, Jabalpur, Jamshedpur, Kanpur, Lucknow, Ludhiana, Madurai, Nagpur, Patna, Pune, Salem, Sholapur, Srinagar, Surat, Tiruchirappalli, Trivandrum, Baroda, Benaras||65% of aggregate area|
|Any other location||70% of aggregate area|
Now you have to compare both – unbuilt area and specified area. and find out the excess area of unbuilt area over specified area.
Excess =( unbuilt area – specified area) /unbuilt area * 100
Make the addition:
Make the addition to the value of capitalized value as per table below.
|Excess %||Premium on capitalized value|
|Up to 5%||Nil|
|More than 5 % but up to 10%||20%|
|More than 10% but up to 15%||30%|
|More than 15% but up to 20%||40%|
|More than 20%||The value of asset should be valued by determined by assessing officer or valuation officer.|
Deduct unearned increment:
When property is held under leasehold land and some part of unearned increase in value is payable to the government, the value of property determined above shall be reduced by least of following:
- Amount payable on transfer of property
- 50% of the value of property determined above.
Kapil owns house which is situated in Ahmedabad . Annual value of the property is Rs. 2,00,000 as per municipal value. Rent received from tenant is 1,20,000 p.a. Municipal tax is Rs. 10,000 which is paid by tenant. Repair expense paid by tenant is Rs. 3,000. Security deposit is 40,000 which is refundable to tenant. The unbuilt area is 70% of aggregate area.
Find out value of property for wealth tax purpose.The property is acquired on 1/4/99 and is built on leasehold land and unexpired lease period is 60 years.
Computation of value of building:
Step 1: find gross maintainable rent:
|Annual value as per municipal value (1)||2,00,000|
|1/9 of 1,20,000||13,333|
|Municipal taxes paid by tenant||10,000|
|15% of deposit (40000*15%)||6,000|
|Annual rent (2)||1,49,333|
|Gross Maintainable rent (higher of (1) and (2)||2,00,000|
Step 2: Find out net maintainable rent:
|Gross maintainable rent||2,00,000|
|Less Total municipal tax||(10,000)|
|Less 15% of GMR (2,00,000*15%)||(30,000)|
|Net Maintainable rent||1,60,000|
Step 3: Find out capitalized value:
Capitalized value = Net maintainable rent * 10 (as property is constructed on leasehold land with more than 50 years expiring period)
Step 4: add premium
Excess of unbuilt area over specified area is 5% (70%-65%(for ahmedabad))
So there is no need to add premium to capitalized value.
Step 5: Deduct unearned income:
There is no liability to pay unearned income to anybody. So ignore this step.
All the steps are completed and we find value of building which should be shown in wealth tax return.
Value of building = Rs. 16,00,000
Valuation of assets of business:
Valuation of asset disclosed in balance sheet:
Steps for valuation:
Step 1: Find out asset value
- For depreciable assets take writtten down value.
- For non depreciation asset (except stock in trade), take book value .
- For closing stock take value taken for income tax purpose.
Step 2: Add 20% in value: make addition of 20% in above value.
Step 3: Calculate individual asset’s value as per schedule III of wealth tax law.
Step 4: Compare step 2 and step 3.
If step 3 is higher than step 2, value as per step 3 is considered as value of individual asset.
IF step 3 is lower than step 2, value as per step 1 is considered as value of individual asset.
Remember that you have to do this process for individual asset.
|Asset||Book value (1)||(2) = (1) + 20%||Value of asset as per schedule III (3)||Final value taken|
Following assets or liability should not be taken into accounts.
- Advance tax paid
- Asset not included in asset definition of wealth tax
- p&l debit balance
- Asset not related to business.
- Debt related to asset not included in definition of wealth tax.
- Debt not related to business
- Contingent liability.
Valuation of interest in firm or AOP:
If you are partner in business, value of firm’s asset should also related to you proportionally. So you have to include value of your interest (assets which of firm which are belonging to you proportionally.) in firm’s asset in wealth tax calculation.
Steps for valuation:
- Calculate value of assets of firm.
- Make two part of it. One part should be equivalent to total capital of the firm. That part should be allocated as per capital contributed by individual partner.
- Second part should be divided as per agreement among st partners for distribution of assets at the time of dissolution of the firm. If there is no such agreement, second part should be divided in profit sharing ratio.
- If asset of firm is eligible for exemption u/s 5, the exemption is available to partner also for calculation of wealth tax charged individually. The exemption is available proportionally. Following formula can be used for it. Exempt assets = portion of firm’s asset belong to partner/total asset of firm * total value of exempt assets.
- If any partner is NRI , he is not required to be taxed for asset outside India. He can reduce value of taxable assets by using following formula.
- Share in asset which is located outside India = Share in asset of NRI in firm’s asset * total value of asset of firm located outside India/ Total value of assets of firm.
- After calculating share in assets of firm of partner, he is required to add his personal asset and reduce that value by exemption available u/s 5 and debt owed.
Star Furniture has two partners Sima and Rati. Rati is NRI. The balance sheet of star furniture has following figures on 31/3/2014.
|Building (outside India)||5,00,000|
|Loan taken for purchase of motor car||1,00,000|
Individual assets of Sima and Rati has following figures.
|Land outside India||0||30,00,000|
Capital of Sima and Rati in business are Rs. 2,00,000 and Rs. 3,00,000 respectively. Profit sharing ratio is 1:1.
Calculation of assets of the firm:
|Building (outside India)||5,00,000|
|Less debt owed|
|Loan taken for purchase of motor car||(1,00,000)|
|Net wealth of the firm||9,00,000|
Allocation of wealth among st partners:
|Share up to share capital||5,00,000||2,00,000||3,00,000|
|In the ratio of p&l a/c||4,00,000||2,00,000||2,00,000|
|Share of residential house in above||3,00,000||1,33,333||1,66,667|
Calculation of net wealth of partners:
|Land outside India||0||30,00,000|
|Share in residential house of firm||1,33,333||1,66,667|
|Share in other assets of firm||2,66,667||3,33,333|
|Less exemption u/s 5 (for any one residential house)||3,00,000||1,66,667|
|Asset exempt because it is outside India for NRI||0||30,00,000|
Valuation of life interest:
Life interest means interest in property during lifetime of donor.
We can understand it with following example.
A has mentioned in his will that B (son of A) will get house after death of A. In this case, when A is alive, B has life interest in house and should pay tax on value of life interest of house.
Steps to calculate life interest:
- Calculate average of the annual gross income for the last three years from the property.
- Reduce average annual expenses incurred for collection of income. The expenses should not increase 5% of the annual income.
- Multiply the amount calculated above with life factor of age given in appendix of schedule III. (you can download it from end of the post.)
- Life interest can be considered higher when assessing officer allows when life tenant cannot insured at normal rates.
- The value cannot exceed market value of the trust corpus.
Raj who born in November 1986 is granted life interest in land of his father. The annual income for three years from the land is Rs. 30,000, Rs. 35,000 and Rs. 25,000. The expenses to get these incomes are Rs. 15,000. Compute life interest of Raj in that land on 31/3/14.
|Average income for three years||90000/3||30,000|
|Less expenses||Maximum 5% of 30,000||(1,500)|
|Net average income||28,500|
|Value of life interest (Age 27 Years)||11.715*28,500||3,33,878|
Valuation of jewellery:
- The value of jewellery under wealth tax rules shall be price which it would fetch if sold in open market.
- When the value of jewellery does not exceed Rs. 5,00,000, Form no. o-8A in prescribed form should be submitted to assessing officer. If Assessing officer is in the view that value declared is less by Rs. 50,000 or 1/3 of the returned value, he shall declare fair market value as value of jewellery.
- If value exceeds Rs. 5,00,000, report of registered valuer in form No. o-8 should be submitted.If assessing officer is in the view that value declared in return is less than fair market value, he can refer the case to valuation officer who determines fair market value of the jewellery which is taken as value of jewellery.
- If the valuation is done by the valuation officer, same value of the jewellery shall be taken for subsequent assessment years taking some adjustment in consideration.
Valuation of Residuary Assets:
- If the asset is not covered by rule 3 to 19, the value shall be determined by assessing officer as per open market value of property.
- If assessing officer refers valuation to valuation officer, the value shall be determined by the valuation officer. (rule 20)
- The transfer made or property acquired by any person for some price shall be ignored for determination of fair market value. (rule 21)
Following are the assets of Miss seeta. Calculate wealth tax payable by her.
|Unused urban land||10,00,000|
|Exempt u/s 5||1,00,00,000|
|Loan taken for building||10,00,000|
|Less basic exemption||30,00,000|
|Taxable net wealth||60,00,000|
|Wealth tax @ 1%||60,000|
I hope this article can help you in wealth tax calculation. I have tried to cover main points. It takes 15 hours to me to write this article but you can share it in 2 seconds and motivate me to write more. So share it and also comment below to ask questions or to say thanks.