Wealth Tax in India

What is wealth tax

Wealth tax, also called equity tax, net worth tax or capital tax was a 1% tax imposed on earnings of over Rs. 30 lakhs per annum of Indian residents, companies and Hindu Undivided Families (HUFs). It was a tax imposed on the net wealth as of 31st March i.e. total wealth (i.e. assets) minus the total liabilities – the assets sold during the financial year hence would not come under the purview of the tax. Moreover, under certain DTAAs or Double Taxation Avoidance Agreements, taxpayers would not have to pay the tax had it been already paid in another country. 

How to calculate wealth tax in India

Suppose you have made earnings of Rs. 50 lakh in a particular financial year. Therefore you would be taxed 1% on 20 lakh rupees (i.e. the amount above Rs. 30 lakhs), this requiring you to pay an additional tax of Rs. 20,000.

Now that you know the wealth tax meaning, let us see some of the rules and details associated with the tax.

Wealth tax rules

• Resident Indians were liable to pay wealth tax on their global assets. 
• However, non-resident Indians and foreigners were liable to pay wealth tax on their assets in India only.
• If a non-resident Indian returned to India, his assets were not exempt from wealth tax. 
• Assets acquired by NRIs within one year of their return were also exempt.

Assets covered under wealth tax 

• Wealth tax was payable on all assets except assets such as shares, mutual funds and securities (called ‘productive assets’) which were exempt from wealth tax.
• Yachts, aircraft and boats were included in wealth tax.
• While one residential home was exempt, more than one own house came under the purview of wealth tax. That being said, wealth tax was not applicable to property if it was used for business or rented for 300 days in a year.
• Tax was levied on cars (based on the market price), except when used in a car rental business.
• Gold, platinum and silver ornaments were included plus cash-in-hand above Rs. 50,000.
• If a taxpayer had to pay wealth tax, transferring his or her assets to the spouse would not result in evasion of levy, since assets even if gifted, would be considered the property of the taxpayer.

Wealth Tax exemptions

• Investment securities (shares, bonds,mutual funds, gold deposit schemes)
• Houses/plots of area below 500 sq. Mts.
• Houses as place of business/profession
• Residential properties rented out for 300 days or more in a year
• Vehicles for hire
• Stock-in-trade business assets

What is the status of wealth tax

Wealth tax in India was charged based on the Wealth Tax Act since 1951 – however the act, along with the wealth tax, was abolished under the Union Budget of 2015.

Instead, the government decided to impose a 2% additional surcharge levied on the super rich and proposed to  increase the surcharge on the super rich from 2% to 12% (later accepted). Super rich persons here were defined as individuals who earned Rs 1 cr or higher (or companies that earned Rs 10 cr or higher). Companies with incomes between Rs. 1 crore and Rs. 10 crore would have to pay a surcharge of 7%. This move came in at a time when there were calls for rationalisation and simplification of tax structure in India to reduce tax collection costs and increase the ease of doing business in India.

The surcharge would be applicable to the following:

1. Individuals
2. Hindu Undivided Families
3. Firms
4. Cooperative societies
5. Local authorities with income exceeding Rs. 1 crore.

Why has wealth tax been abolished

The following are some of the primary reasons why wealth tax has been abolished in India – 

1. It reduces administrative burden and makes tax details easier to track due to improved reporting
2. It widens the tax base as the number of people paying the wealth tax are far less than the number of people paying the income tax.
3. Makes the tax system easier to operate and simpler to understand along with enhanced transparency – this in turn increases the overall tax reporting and filing 
4. Better reporting reduces tax avoidance and tax leakage
5. The surcharge system has increased revenues by over Rs. 9000 cr since 2015

Impact on the super rich taxpayers

The super rich are theoretically going to pay more because of the 2% surcharge. Therefore, there may be an impact on the number of ultra high income individuals wishing to stay back in the country.

Conclusion

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