All you need to know about wealth tax
When compared with an individual's income tax obligations, awareness of
wealth tax is minimal. Broadly, wealth tax is determined by your
nationality, residential status and location of the asset.
{mosimage}When compared with an individual's income tax obligations, awareness of wealth tax is minimal. Broadly, wealth tax is determined by your nationality, residential status and location of the asset. If you are an Indian national and resident as per Indian tax laws, you will have to pay wealth tax in India, even on global assets.
The intent of the law is to tax assets that do not generate an income. For instance, though your earnings are deposited in a savings bank account, it does not come under the purview of wealth tax as the balance generates interest, which is taxable.
In case of some assets, such as a second property that you own, you can avoid wealth tax by generating an income from it, meaning by renting it out for at least 300 days in a financial year.
WHICH ASSETS ARE IN THE PURVIEW OF THIS LAW?
For one, jewellery generates wealth tax. Jewellery can be made of any precious metal, including gold, silver or platinum, or an alloy containing precious metals. Even ornaments with precious or semi-precious stones, even set in objects such as furniture or utensils, or sewn onto clothing qualify for payment of wealth tax.
Real estate is another major asset that incurs wealth tax. Realty investments such as urban land bigger than 500 sq metres, a second house or property that has not been let out for more than 300 days in a financial year and a farm house within 25 km from the local limits of a municipality also require you to pay wealth tax.
Further, if you own a car, a boat, a yacht or an aircraft or keep cash in excess of Rs 50,000, these too shall incur wealth tax.
Moreover, it is not necessary that an asset must be in your ownership for you to pay tax on it. For instance, if you transfer assets (that incur wealth tax) to your spouse without adequate consideration (meaning without being paid for it, say, as a gift), the value of the asset that was transferred must be added to your net wealth for taxation purposes.
There are also wealth tax laws pertinent to non-resident Indians, or NRIs. An asset acquired in India using money brought from the country of residence is exempt from tax under this law. However, the asset would have to be acquired within a year prior to the date of return or at any time thereafter. The exemption is available for seven successive assessment years from the date of return to India.
HOW DO YOU VALUE YOUR WEALTH?
The value of an asset is as on 31 March of the tax year. There are guidelines provided for valuing your assets.
For instance, the valuation of a property shall be determined in accordance with Part B of Schedule III to the Wealth Tax Act. For assets such as urban land, cars, yachts, boats and aircraft, valuation shall be based on a fair market value, or FMV. It is best to have an approved valuer decide the FMV as the assessing officer might reject the estimates that have been prepared by you.
As for jewellery, bullion rates on the valuation date can be used to determine the FMV of gold and silver. A statement in Form No O-8A is to be submitted if the value of the jewellery does not exceed Rs 5 lakh. However, if it is valued at over Rs 5 lakh, a registered valuer's report must be submitted with Form No O-8. Of course, the report is not binding and an assessing officer can determine FMV separately.
The reports made by a registered valuer or any other documents that could not be furnished along with the tax return will have to be produced before the assessing officer on demand.
EXEMPTIONS
Debts incurred by you to acquire your assets shall be allowed as a deduction while calculating net wealth. In addtion, assets (excluding cash) that are held as stock-in-trade (held for the purpose of its trade) do not come under the purview of wealth tax.
HOW MUCH DO YOU PAY?
Once you have the value of your assets, how much wealth tax do you need to pay? Wealth tax payable is 1% of the net value of taxable wealth if it exceeds Rs 30 lakh as on valuation date for the financial year. The due date for filing wealth tax return is the same as for income tax return. However, there is still time to file your wealth tax returns for 2012-13 without penalty.
WHAT IF YOU DO NOT PAY WEALTH TAX?
As your Permanent Account Number, or PAN, is required for all financial transactions, a tax officer can trace your investments, including purchase of jewellery, property, vehicles and so on, quite easily.
If your income tax file is scrutinsed, the assessing officer has the authority to ask for a 'statement of affairs', which is a summary of all your assets and liabilities. This will also help the assessing officer determine if you have wealth tax obligation.
The repercussions of not filing wealth tax return or filing an incorrect return is harsh. The provisions of regular assessment that apply to income tax also apply to wealth tax. Interest at 1% per month is payable for failure to pay wealth tax on due date.
There are also provisions to impose a penalty and/or prosecute an individual for not filing wealth tax returns.
TAPATI GHOSE
Senior Director, Deloitte Haskins & Sells
The intent of the law is to tax assets that do not generate an income. For instance, though your earnings are deposited in a savings bank account, it does not come under the purview of wealth tax as the balance generates interest, which is taxable.
In case of some assets, such as a second property that you own, you can avoid wealth tax by generating an income from it, meaning by renting it out for at least 300 days in a financial year.
WHICH ASSETS ARE IN THE PURVIEW OF THIS LAW?
For one, jewellery generates wealth tax. Jewellery can be made of any precious metal, including gold, silver or platinum, or an alloy containing precious metals. Even ornaments with precious or semi-precious stones, even set in objects such as furniture or utensils, or sewn onto clothing qualify for payment of wealth tax.
Real estate is another major asset that incurs wealth tax. Realty investments such as urban land bigger than 500 sq metres, a second house or property that has not been let out for more than 300 days in a financial year and a farm house within 25 km from the local limits of a municipality also require you to pay wealth tax.
Further, if you own a car, a boat, a yacht or an aircraft or keep cash in excess of Rs 50,000, these too shall incur wealth tax.
Moreover, it is not necessary that an asset must be in your ownership for you to pay tax on it. For instance, if you transfer assets (that incur wealth tax) to your spouse without adequate consideration (meaning without being paid for it, say, as a gift), the value of the asset that was transferred must be added to your net wealth for taxation purposes.
There are also wealth tax laws pertinent to non-resident Indians, or NRIs. An asset acquired in India using money brought from the country of residence is exempt from tax under this law. However, the asset would have to be acquired within a year prior to the date of return or at any time thereafter. The exemption is available for seven successive assessment years from the date of return to India.
HOW DO YOU VALUE YOUR WEALTH?
The value of an asset is as on 31 March of the tax year. There are guidelines provided for valuing your assets.
For instance, the valuation of a property shall be determined in accordance with Part B of Schedule III to the Wealth Tax Act. For assets such as urban land, cars, yachts, boats and aircraft, valuation shall be based on a fair market value, or FMV. It is best to have an approved valuer decide the FMV as the assessing officer might reject the estimates that have been prepared by you.
As for jewellery, bullion rates on the valuation date can be used to determine the FMV of gold and silver. A statement in Form No O-8A is to be submitted if the value of the jewellery does not exceed Rs 5 lakh. However, if it is valued at over Rs 5 lakh, a registered valuer's report must be submitted with Form No O-8. Of course, the report is not binding and an assessing officer can determine FMV separately.
The reports made by a registered valuer or any other documents that could not be furnished along with the tax return will have to be produced before the assessing officer on demand.
EXEMPTIONS
Debts incurred by you to acquire your assets shall be allowed as a deduction while calculating net wealth. In addtion, assets (excluding cash) that are held as stock-in-trade (held for the purpose of its trade) do not come under the purview of wealth tax.
HOW MUCH DO YOU PAY?
Once you have the value of your assets, how much wealth tax do you need to pay? Wealth tax payable is 1% of the net value of taxable wealth if it exceeds Rs 30 lakh as on valuation date for the financial year. The due date for filing wealth tax return is the same as for income tax return. However, there is still time to file your wealth tax returns for 2012-13 without penalty.
WHAT IF YOU DO NOT PAY WEALTH TAX?
As your Permanent Account Number, or PAN, is required for all financial transactions, a tax officer can trace your investments, including purchase of jewellery, property, vehicles and so on, quite easily.
If your income tax file is scrutinsed, the assessing officer has the authority to ask for a 'statement of affairs', which is a summary of all your assets and liabilities. This will also help the assessing officer determine if you have wealth tax obligation.
The repercussions of not filing wealth tax return or filing an incorrect return is harsh. The provisions of regular assessment that apply to income tax also apply to wealth tax. Interest at 1% per month is payable for failure to pay wealth tax on due date.
There are also provisions to impose a penalty and/or prosecute an individual for not filing wealth tax returns.
TAPATI GHOSE
Senior Director, Deloitte Haskins & Sells
