Wealth Tax India: Importance, Calculation, and Rules

Wealth Tax India: Importance, Calculation, and Rules

What is Wealth Tax?

A wealth tax is a direct tax that is levied on individuals who fall in the ultra-high net worth category. It was introduced in 1962 to reduce income inequality in Indian society. However, it was abolished in the budget of 2015 (effective from the financial year 2015-2016) as it was proving to be expensive.

To cover up the leakage from this loss of revenue, the surcharge was increased from 2% to 12% for the super-rich section.

Individuals who earn an income of above Rs. 1 crore and companies with an income of above Rs. 10 crore fall in the super-rich category.

Importance of Wealth Tax

Wealth tax was levied to reduce the income disparity between the rich and the poor by way of taxing the rich more.

It has also been politically significant with many political parties wanting to increase the rate of wealth tax from 1% to 3%. Also, it has always made its place significantly in the pro-poor and pre-industry debates and narratives.

Who Pays Wealth Tax?

Every individual, Hindu Undivided Family (HUF), or company with a net wealth of above Rs. 30 lakhs is liable to pay wealth tax. Resident individuals in India whose net wealth exceeds Rs. 30 lakhs (assets in India and abroad) are liable to pay wealth tax. The Non-Resident Indians have to pay wealth tax on property they own in India only.

Rules and Rates under Wealth Tax

If the net wealth of an individual, HUF, or company exceeds Rs. 30 lakhs on the valuation date, wealth tax @ 1% is chargeable on the amount over and above Rs. 30 lakhs. Also, they have to submit a return of wealth. So, for example, if the net wealth for the year comes to Rs. 50 lakhs, a wealth tax will be 1% of Rs. 20 lakhs, which comes to Rs. 20,000.

Due Dates and Penalties

The due date for filing the return of net wealth is the same as the due date for filing of income tax return, that is, 31st July. However, if a taxpayer (individual, HUF, or a company) is liable to audit under Income-tax Act, the due date is 30th September.

A belated return of wealth can be filed within 1 year from the end of the assessment year or anytime during the assessment whichever comes earlier.

In case of delay in filing the return of wealth, interest @ 1% per month is charged.

If authorities notice that some assets have been concealed or not disclosed, they can charge a penalty ranging between 100% and 500% of the undisclosed wealth.

Computation of Wealth Tax

Since, wealth tax is levied @ 1% on the net wealth of an individual, HUF, or a company, one needs to calculate the net wealth as below. 

Value of assets as of the valuation dateRs XXX
Add: Deemed assets or deemed wealthRs XXX
Less: Exempt assets(Rs. XXX)
Less: Debts or loans to acquire the assets(Rs. XXX)
Net WealthRs XXX

Assets Covered under Wealth Tax

The term ‘asset’ is defined under Section 2(ea) of the Wealth-tax Act. Wealth tax is levied on the value of assets covered under this definition. Some of the assets covered under wealth tax include

  • Real estate (residential or commercial property)
  • Jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum, or any other precious metal
  • Cash-in-hand above Rs. 50,000
  • Boats, yachts, and aircraft
  • Urban land
  • The market price of a car, except when used in a car hiring business
  • The asset transferred by an individual to the spouse, his/her son’s wife, a person or an association of persons for the immediate or deferred benefit of the individual or his/her spouse or his/her son’s wife.
  • Assets belonging to the minor child of an Individual
  • Interest in a partnership firm or association of persons, and much more.

Assets Exempted from Wealth Tax

The following assets are exempted from Wealth Tax: 

  • Property held under trust, religious or charitable purposes
  • House or part of a house or plot of land not exceeding 500 square meters
  • Investment securities—shares, bonds, mutual funds, etc.
  • Residential properties rented out for 300 days or more in a year
  • Vehicles for hire, and much more.

Debts or loans to acquire the assets: Any debt or loan that is being serviced by the individual to acquire the assets forming part of the calculation of net wealth shall be deducted from the calculation of net wealth.

Why Was the Wealth Tax Abolished?

The Government of India found it difficult to manage and sustain the high costs of tax collection. Since it was no longer feasible for them to make losses, they abolished Wealth Tax from the budget 2015.

Having a different tax on wealth was complicating the computation and hence to minimize the efforts and make tax collection simpler, the rate of surcharge was increased from 2% to 12% for the super-rich.

Also, there was low awareness about wealth tax and its computation which led to leakages in the collection of wealth tax, resulting in an increase in notices to individuals, HUFs, and companies for the collection of wealth tax. This led to an increase in governance costs and it also increased the costs of litigation and managing them.

All of these reasons forced the government to abolish wealth tax and made them increase the surcharge instead.

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Q. What is the difference between wealth tax and income tax?

Wealth tax is calculated on assets acquired with money left over while income tax is calculated on the income earned during a financial year.

Q. Why was wealth tax important?

Wealth tax was levied to reduce income disparity between rich and poor, by taxing the rich more.

Q. With wealth tax abolished, is it necessary to disclose details of assets held in India and abroad?

Although wealth tax has been abolished, it is still necessary to provide information on assets held in India and abroad.

Q. What is the rate of a wealth tax?

Wealth tax is charged @ 1% on wealth valued over and above Rs. 30 lakhs

Q. How much wealth tax was collected in FY14 before it was abolished?

An amount of Rs. 1,008 Crore was collected as wealth tax in the financial year 2014 before it was abolished in the Union budget 2015.