Wealth tax exemption and taxability

Wealth tax is direct tax which is collected on properties held. There are taxable assets and  Similarly wealth tax exemption is also available for many assets. In this article, I have given list of taxable assets under wealth tax act in India and exemption available under wealth tax act.

What is wealth tax?

You can understand from the name that wealth tax is levied to wealth. But interesting thing is that wealth tax is not levied to all the assets of the person but only on idle asset of the person. The assets which are not utilized to generate revenue are  covered here.

 

Whom to charge wealth tax?

Wealth tax is charged to following persons who are residents of india :

1. Individual
2. HUF
3. company

Wealth tax is charged on all assets (located in India and outside India ) of Resident person of India.

Wealth tax to NRI:

 

For non residential individual, wealth tax is charged only on assets which are located in India. Assets outside India of NRI are exempt from wealth tax. There is also exemption available to NRI for money brought by him while settling in India u/s 5. We will see exemptions in this post also.

 

 

Wealth tax exemption to following person:

Wealth tax is not chargeable to following persons:

1. Company registered u/s 25 of companies act, 1956
2. cooperative society
3. social club
4. mutual fund
5. political party
6. RBI

Rate of wealth tax:

Wealth tax rate is 1%.

Basic wealth tax exemption limit:

Basic exemption limit for wealth tax liability is Rs. 30 lakh. So for up to wealth (assets) of Rs. 30 lakh, you have to no need to pay tax.

Computation of wealth tax liability:

Steps for calculation of wealth tax liability:

1. Compute value of total assets on the date of  31/3 of previous year. The asset should be included in the definition of asset.
2. Reduce amount of debt taken for that asset which is still pending for payment on 31/3.
3. Minus exemption available.
4. Minus basic exemption limit of Rs. 30,00,000
5. Calculate net amount and charge 1% tax on it.

So the basic step to compute and pay wealth tax is get knowledge of taxable assets under wealth tax act.After that we will shift to wealth tax exemption and valuation of various assets. Final step will be online return filling of wealth tax.

 

Taxable assets under wealth tax act:

 

 

According to definition of asset, following assets are covered:

Guest house, residential house or commercial building (section 2(ea) (i):

Meaning:

1. Any building or land appurent thereto whether used for commercial or residential purposes or for the purpose of guest house.
2. A farm house situated within 25 kilometres from the local limits of any municipality or a cantonment board.

Exclusion:

1. A residential house given to employee or officer or director who is in full time employment by company. The gross annual salary of such employee should be less than 10 lakh.
2. A house held as stock in trade. Means house held by builder for sale purpose.
3. A house used for business or profession purpose.
4. House which is given on let out for minimum period of 300 days in previous year.
5. commercial complex.

So tax is not levied on above five type assets.

Motor cars (section 2(ea)(ii):

Tax is levied on motor car but there is exclusion for two types:

Exclusion:

1. Motor cars held as stock in trade
2. Motor cars used for business purpose

Jewellery, bullion, utensils of gold, silver etc: (section 2(ea)(iii):

Furniture, jewellery, buillion, utensils etc made by gold, platinum, silver or precious metals are covered here.

Exclusion:

jewellery etc. held as stock in trade

Gold Deposit bonds

 

Yachts, boats, aircrafts (section 2(ea)(iv):

Yachts, boats, aircrafts are also considered as asset.

 

Urban land (section 2(ea) (v):

Meaning of urban land:

Any area which is comprised within the jurisdiction of municipality or contonment board and which has a population of not less than 10000 according to last census.

OR

Population	Area
10000 to 1,00,000	2 km from municipality/cantonment board
1,00,000 to 10,00,000	6 km from municipality/cantonment board
More than 10,00,000	8 km from municipality/cantonment board

 

So land situated at place where population is less than 10000 is not covered and tax is not levied on it.

Exclusion:

Agricultural land

land on which construction is not permissible under any law.

Land on which building has been constructed with the approval of the appropriate authority.

Any land held by landlord for industrial purpose for a period of 2 years from the date of acquisition.

Any land held by landlord as stock in trade for a period of 10 years from the date of acquisition.

 

Cash in Hand (section 2 (ea) (vi):

 

For individual or HUF:

cash in hand at valuation date in excess of Rs. 50,000. So 50,000 Rs. is exempt but excess of 50,000 is taxable.

 

For any other person:

Any amount not recorded in books of accounts.

All these assets are on the name of business or company. In excess of them, some assets are not on the name of assessee but they are inclusive in assets covered as deemed assets.

Deemed assets (section 4):

Assets transferred by one spouse to another (section 4(1)(a)(i):

1.  when asset is transferred from one spouse to another without adequate consideration after March 31, 1956, the value of asset on valuation date shall be taxation in the hand of transfer or.
2. The marriage should be subsist on the date of transfer and date of valuation.
3. Asset is exempt if gift tax is already charged on that asset.
4. Accretions to asset is not covered under section 4. Example, if husband gifts house to wife, then value of house is taxable in the hand of husband but if wife receives rent and purchase car from the rent , then value of car is not taxable in the hand of husband.

 

Assets held by minor child (section 4(1)(a)(ii):

1. Similarly provision of clubbing, value of assets held by minor child on valuation date shall be taxable in the hand of the parent whose net wealth is greater.
2. Where such assets once included in either parent, it cannot be included with the assets of other parent unless assessing officer is satisfied that it is necessary to do so.
3. The aforsaid clubbing provision shall not apply when the assets are acquired by minor child with manual work or skill or special knowlege or talent.
4. The aforesaid clubbing provision is not applicable to minor child who is suffering from disability specified in section 80U of the income tax act.

Assets transferred to a person or AOP (section 1(a) (iii):

 

1. Asset is transferred to individual or AOP without adequate consideration.
2. The transfer is for benefit of transferor or his spouce.
3. Gift tax was not levied on that asset.
4. In this case, value of asset is to included in the wealth of transferor.

 

Assets transferred under revocable transfer (section 4(1)(a)(iv):

1. Asset is transferred to individual or AOP by individual.
2. Asset is transferred under revocable transfer after march 31, 1956.
3. The asset may be held by transferee on relevant valuation date.
4. If all these conditions are satisfied, the asset is deemed asset of transferor and value of asset shall be included in the wealth of transferor.

 

Meaning of revocable transfer:

Revocable transfer means when transfer is revocable within 6 years or lifetime of the beneficiary. It also includes transaction when transferor gets direct or indirect benefit from the asset or transferor can re assume power on whole or part of asset.

 

Assets transferred to son’s wife(Section 4(1)(a)(v):

 

1. Asset is transferred to son’s wife without adequate consideration.
2. Asset is transferred after March 31, 1973.
3. The asset is held by son’s wife on valuation date.
4. The relationship between father-in-law/mother-in-law should subsist on the date of transfer and on the date of valuation.
5. If all above conditions are satisfied, the asset should be clubbed with wealth of transfer er.

 

Assets transferred for benefit of son’s wife (section 4(1)(a)(vi):

 

Similarly if asset is transferred for the benefit of son’s wife to any individual or AOP, it is also considered as deemed asset and clubbed with the wealth of transferer. Conditioned mentioned in section 4(1)(a)(v) should be satisfied.

 

Interest in partnership firm or interest of partner (section 4(1)(b):

 

When you are partner of firm or member of AOP, interest as a partner or member in the assets of firm or AOP shall be included for wealth tax computation purpose. The interest shall be calculated as per schedule III to the wealth tax act.

If minor is included in the firm, interest of minor in assets of firm shall be clubbed with the value of asset of the parent. (section 4(1)(a)(ii).

 

Conversion of property by individual into joint family property (section 4(1A):

 

•  Individual transferred his separate property to HUF in which he is member without adequate consideration.
• If property is transferred before partition of HUF, value of property transferred shall be included in net wealth of individual.
• If property is transferred after partition of HUF and members of HUF received part from the property, the part received by wife of individual shall be included in the net wealth of individual.
• The property is transferred after 31/12/1969.

 

Gifts by book entries (section 4(5A):

 

• When gift is made by mere book entry by individual, HUF, firm, AOP, BOI and there is no real transfer then the value of gift shall be considered as asset of donor (who has given gift).
• Gift is valid if there is sufficient proofs that property is really transferred and there is sufficient cash and bank balance in accounts on the date of gift.

 

Impratible estate (section 4(6):

 

Holder of impartible estate have to pay wealth tax on all the assets included in impartible estate.

 

Property held by member of housing society (section 4(7):

 

• When any person holding property of housing society,company or HUF on lease or installment purchase, he shall be deemed to be owner of the property.
• He can reduce value of property by deducting installment payable’s amount. Remaining amount shall be considered taxable under wealth tax act.

 

Property received under part performance of contract (section 4(8):

 

• Any person who receives property for part performance of contract shall be deemed to be owner of the property.
• Any person who acquires property under lease shall be also become deemed owner of the property.
• The lease should not be monthly basis or for a period not exceeding one year.

 

 Wealth tax exemption for some assets (section 5):

Following assets are entitled for wealth tax exemption:

Property held under trust for charitable purpose (section 5(i):

• when trust referred to in clause 22, clause 22A or clause 22B or clause 22C of section 10 holds any property, it is exempt from wealth tax.
• Condition is that the business carried out by trust should be religious or charitable purposes.
• The activity may be publications of book, printing of books or business notified by central government in this behalf in the official content.

 

Coparcenary interest in HUF (section 5(ii):

Interest in HUF by member is exempt from wealth tax.

 

Residential building by former ruler (section 5(iii):

 

Former ruler of principal state can get exemption for one residential house used by him. He cannot exemption for more than one house. He can get exemption for new building also.

 

Jewellery of former ruler (section 5(iv):

 

Jewellery owned by former ruler of principal state which has recognised by central government as heirloom is exempt.

 

Assets belonging to Indian repatriates (section 5(v)):

When Indian origin person returns to India, assets brought by him in India or assets purchased by him from money brought him in India are exempt from tax. The exemption is available for 7 assessment years. Suppose person comes to India in financial year 2013-14, exemption is available for him for 7 a.y. starting from year 2014-15. (up to a.y. 20-21)

Indirectly government is giving incentive to settle in India to foreigners.

 

Exemption for one house (section 5(vi)):

 

• Exemption is available for one house / part of house owned by Individul or HUF. The house can be self occupied or let out.
• Exemption is available for land for area up to 500 square metres.

 

Exemption for debt:

 

You should not pay tax for the property which you actually not own completely. Suppose I have one house and I have taken it from loan and loan installments are pending. I am actually owning part of house. So I have to pay wealth tax on amount by calculating value of house reducing value of installment pending.

So you can claim exemption for debt owned by you for particular asset for valuation date.

So In this post, we see about wealth tax exemption and list of assets which are taxable. In next post, we will understand valuation of assets in wealth tax law.You can download pdf version of this article from bottom of the post or print button. Don’t forget to share this post so that we get inspiration to write more.