The deadline of filing income-tax returns, 31 July, is over and I am sure most of you must have heaved a sigh of relief at having met it. But did you know that you may also be liable to file a wealth tax return by the same date if you are liable to wealth tax? Have you ever examined whether you are liable to wealth tax?
Wealth tax is payable by all persons having taxable wealth of at least Rs 30 lakh as on 31 March of each year. One may feel that this limit is too low and that even most middle-class people would be liable to wealth tax. Fortunately, that is not the position, as only certain specified assets, which are considered to be non-productive, are liable to wealth tax. These assets are residential houses or commercial buildings, urban land, jewellery, motor cars, cash in hand in excess of Rs 50,000 and yachts, boats and aircraft.
Most investments are fortunately not regarded as assets for the purpose of wealth tax. Therefore, fixed deposits with banks or companies, shares, units of mutual funds, bonds and debentures, and other savings instruments would be outside the wealth tax net.
Which assets attract wealth tax and when
Residential and commercial properties: The provisions relating to residential houses or commercial buildings are not linked to the market value of such properties. In case of residential houses or commercial buildings, a property that is let out for at least 300 days during the year is not taxable. Again, one residential house is exempt from wealth tax. Besides, for residential houses acquired before 1 April 1974, the value is to be determined by capitalising the net maintainable rent, which normally is a nominal figure far below the cost.
Further, for one residential house acquired for own residential purposes after April 1974, if the cost is less than Rs 50 lakh (in Mumbai, Kolkata, Delhi or Chennai) or less than Rs 25 lakh (for other cities), the value is again to be determined by capitalising the net maintainable rent. It is only for all other houses that the higher of the actual cost or the value determined by capitalizing the net rental value is to be taken. Therefore, for a house, the value taken for wealth tax purposes would generally not exceed the cost and one does not pay wealth tax based on the market value.
Urban land and jewellery: For urban land and jewellery, the market value of these assets as on 31 March of each year is to be taken. With gold prices having skyrocketed in recent years, you may perhaps not be even aware of the fact that the market value of the small amount of jewellery that you own may exceed Rs 30 lakh. It is, therefore, advisable to get valuation done from a valuer registered with the income-tax department (generally, most reputed jewellers are registered) to check whether you are liable to wealth tax.
Urban land would include land situated within municipal limits or within notified limits from certain municipalities. Fortunately, urban land on which a building stands or on which no construction can be carried out on account of any law is to be excluded for wealth tax purposes.
Motor cars: For motor cars also the market value is to be taken for wealth tax purposes. Generally, one adopts 80% of the insured value of the car as the market value, as upheld by a tribunal decision.
Debt taken for taxable assets deductible
All debt owed by you in relation to the taxable assets are deductible from your taxable wealth. If you have taken a car loan or a housing loan, the amount of such loans outstanding as on 31 March can, therefore, be deducted in computing your taxable wealth. At times, the value of such debt may even exceed the valuation of assets computed under wealth tax valuation rules, but would still be deductible.
Gifts won’t reduce tax liability
Can you reduce your taxable wealth by gifting some jewellery or other assets to your spouse or minor children? Unfortunately, such planning is not possible, as there are provisions for clubbing of such wealth with yours, similar to the provisions under income-tax laws. Of course, you can gift your assets to your major children without attracting income-tax or wealth tax. In such cases, you need to factor in the risk of your losing control over the assets.
How much is your liability
If, after having done your homework, you realize that you are liable to wealth tax, what is the amount of your liability? Wealth tax payable is only on the amount of taxable wealth exceeding Rs 30 lakh, and the rate of wealth tax is a flat amount of 1%. Such wealth tax is payable on the same assets year after year, unlike income-tax, which is paid only once on a particular income, and that is where the shoe pinches.
It is, however, important to file your wealth tax returns with proper disclosure of all taxable assets so that the assets acquired by you out of your taxed income are not presumed to be acquired out of unaccounted income due to failure to disclose them in your wealth tax returns.
Gautam Nayak is a chartered accountant.
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