Understanding Wealth Tax in India

The Wealth Tax Act in India was levied by the central government on Indian companies and individuals. The tax is also imposed by certain states. It was set at a flat rate and was charged on the value of an individual's assets, including buildings, land and cars.

Essentially, the wealth tax act was charged on assets above a certain wealth threshold. The intention of this tax was to lower wealth inequalities and the rule applied to both individuals and companies.

Now that we understand the wealth tax's meaning, let’s take a look at who is liable for this tax.

One of the key criteria to determine the liability of wealth tax in India was the residential status of the individual.

Indian residents were liable to pay the wealth tax for assets owned across the globe. Non-resident Indians and foreigners, however, were only liable to wealth tax for assets owned in India.

If an NRI returns to India, their assets will be taxed under the wealth tax. However, assets acquired by NRIs within one year of their return are exempt from taxes.

• Assets such as real estate and gold are liable to wealth tax. Ornaments of gold, silver, and platinum also fall under the purview of wealth tax.

• Wealth tax is applicable for cash-in-hand of more than ₹50,000.

• Aircraft, yachts, and boats are also liable for wealth tax.

• One residential house is exempt from wealth tax. However, owning more than one house would be taxable under the Wealth Tax Act.

• Wealth tax is applied on the market price of a car aside from when it is used for a car hiring business

• Liability of wealth tax cannot be evaded by gifting the assets to one’s spouse or other close relatives, as gifted assets are also considered property of the taxpayer.

• “Productive assets” such as mutual funds, shares, securities, units of gold deposit schemes, etc. are exempt from wealth tax.

• Vehicles for hire.

• Houses or a plot that is no bigger than 500 sq. metres.

• Houses as professional or business spaces.

• Stock-in-trade business assets.

• If a residential property is used for business or rented for over 300 days in a year, the wealth tax would not be applicable.

The net wealth of the taxpayer is considered when calculating wealth tax as per the valuation rate. Let’s take a look at how net wealth is calculated:

• Gross Assets = (The value of taxable assets as outlined by the valuation rules + Clubbed/deemed) - assets exempt from wealth tax

• Taxable wealth = Total value of assets - debts that have been used to acquire assets

• Wealth tax = 1% of taxable assets

No additional fees or surcharges need to be paid over and above the wealth tax. Now, let’s understand the aforementioned formula with an example:

As of 31st March 2020, Mr. Amol has the following assets:

• House Property with a net value of ₹80 lakhs

• Equity shares listed in companies ₹10 lakhs

• Bank deposits ₹25 lakhs

• Jewellery and gold bullion ₹45 lakhs

Considering the above, the net worth of Mr. Amol would be: 80 lakhs + 10 lakhs + 25 lakhs + 45 lakhs = ₹160 lakhs

Mr. Amol is liable to 1% of ₹160 lakhs, which is ₹1.6 lakhs for the financial year 2020-21

To Simplify Tax Laws: Complex tax laws can lead to a lot of confusion among taxpayers. Even for commuting their gross wealth, taxpayers were expected to get a valuation of their assets based on the applicable rules of wealth tax.

For assets such as jewellery, taxpayers had to connect with a registered valuer and procure a valuation report. So, the Indian Government decided to do away with the wealth tax to introduce greater transparency and simplicity in tax regulations.

To Boost Revenue Collection: The government estimated that they would earn greater revenue by replacing the wealth tax with a surcharge.

Insufficient Awareness: Only a limited strata of society were aware of the wealth tax and its associated obligations, which resulted in many not filing their wealth tax.

Just as income is subjected to income tax, the wealth of the taxpayer is also subjected to wealth tax, which is 1% of their net wealth. However, owing to the increased complexity of the tax laws, the wealth tax was later abolished by the Indian government in 2015.

Wealth creation is a multi-faceted strategy and doesn’t just involve the accumulation of assets or property. It comes with various methods. One such way is by reducing your tax liability by investing in medical insurance in India.

A health insurance policy offers financial benefits in light of soaring medical and healthcare expenses and tax benefits. For instance, premiums payable towards critical illness insurance from Tata AIG can get a tax exemption of up to ₹25,000.

These plans are a great way to secure your family members against critical illness and reduce your tax liability. We also offer several other types of plans like health insurance for senior citizens, to cater to age-related illnesses for those over 60.