Wealth Tax in India: Its Meaning and How Does It Works

2024-09-20

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Every individual who earns income in some or other way, be it salary, income from property, business or profession, or from investments, is liable to pay the income tax. The Government of India levies Income Tax on your income during the previous financial year if it falls under the income tax slab rates.

Wealth tax is a direct tax that is applied to your standing wealth if it exceeded the specified wealth threshold.

What does Wealth Tax mean?

Wealth tax was a charge levied on the book or the market value of the personal assets of rich individuals. This was also referred to as capital tax or equity tax. The Government used to charge the wealth tax only on the richer sections of the society. Wealth tax in India was governed by the Wealth Tax Act, 1957.

Who were Liable to Pay Wealth Tax?

Every individual whose net wealth was subject to tax had to pay the wealth tax in India.

Liability of wealth tax applied to the following Indian residents:

Individual taxpayers
HUFs
Companies

The general rule was that all the global assets of the resident Indians were subject to wealth tax.

Additionally, the Non-Resident Indians who held their assets in India were also subject to the wealth tax on their assets held in India.

These taxpayers also had to file the return of their net wealth. The due date for this return used to be the same as that of Income-tax return filing.

Threshold for Wealth Tax

Any individual, HUF, or a company whose total net wealth in the preceding financial year exceeded Rs. 30 lakhs, on the date of valuation of assets, was subject to a wealth tax at the rate of 1% of the amount over Rs. 30 lakhs.

How to Calculate Wealth Tax?

Following is the table showing the computation of the net wealth subject to taxation:

Particulars	Amount
Add: Deemed wealth	xxx
Less: Exempt Assets	xxx
Less: Debts incurred related to the assets	xxx
Sum Total	xxx

If the total of all the above wealth heads exceeded Rs. 30 lakhs on the date of valuation of assets, wealth tax was applicable at the rate of 1% on the amount over Rs. 30 lakhs.

Mudit and Sarang are two individual taxpayers under wealth tax consideration.

Here’s the details of their wealth and tax calculation:

Particulars	Mudit (Rs)	Sarang (Rs)
Add: Deemed wealth	1.5 crores	1.9 crores
Less: Exempt Assets	15 lakhs	50 lakhs
Less: Debts incurred related to the assets	50 lakhs	1.2 crores
Sum Total	85 lakhs	20 lakhs

As Mudit's total wealth exceeds Rs 30 lakhs he will need to pay a wealth tax, while Sarang can go without it.

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The above calculation and illustration of figures are indicative only and not on actual basis.

What to Include in Wealth Tax Estimate?

The following assets were included in the wealth tax meaning:

Building
Vehicles
Jewellery, bullion
Yachts, boats, and aircrafts
Urban land
Cash
Deemed Assets

Deemed Wealth

Deemed wealth refers to the assets that do not legally belong to the assessee, but are clubbed with his assets while computation his net wealth, These include:

Assets transferred to taxpayer's spouse
Assets transferred to a beneficiary of the taxpayer
Assets transferred to son’s wife
Assets transferred to a beneficiary of the son’s wife
Assets held by a minor
The interest of the taxpayer in the assets of a firm/association
Family property
Assets transferred under a revocable transfer
Monetary gifts entered by the taxpayer in his books of accounts
Impartible assets held by the taxpayer
Any Building allotted to the taxpayer under a housing scheme
A Building for which taxpayer has acquired the rights
A Building where the taxpayer is allowed to take/ retain possession in partial performance of a contract.

Exemptions in Wealth Tax

Following are the Assets that were not considered as a part of net wealth for calculating the wealth tax

Property held by a trust, for charitable or religious purposes.
Interest in a coparcenary property of a Hindu Undivided family.
Jewellery possessed by a custodian of a royal family, not being his/her wealth.
Money/Asset brought in India by an individual of Indian origin or an Indian citizen.
In the case of the Individual/HUF, the house or the part of a house or any plot of land whose area doesn’t exceed 50 square meters.

No Wealth Tax: Opportunity to Invest and Grow Wealth

As of now, the government has discontinued the wealth tax in India. Earlier the taxpayers had to necessarily pay the tax on their wealth exceeding the threshold. Now, in absence of the wealth tax, you have the golden opportunity to invest your savings and build your wealth through the various savings and investment plans.

The following investment options let you grow your wealth and save tax at the same time.

Equity Linked Savings Schemes (ELSS)
Unit Linked Insurance Plans (ULIP)
Guaranteed Savings Plans
Public Provident Fund (PPF)
New Pension Scheme (NPS)

How do Tax Saving Investments Work?

Equity Linked Savings Scheme and ULIP allow you to invest in a portfolio of equity stocks. Thus, you can enjoy the equity market growth while saving tax at the time of investment.

You can also earn tax-free returns if you take care of the limits in the instruments:

Gains from ELSS will become taxable if they exceed Rs 1 lakhs
ULIP returns become taxable if your annual investment in ULIP exceed Rs 2.5 lakhs (w.e.f. 1st Feb 2021)

NPS Tier-I account, which is meant for retirement savings, allows you to save tax on invested money. While this account gives you the option of equity growth, the most aggressive investment option has a 50% equity allocation.

PPF and guaranteed savings plans are investments for safe investors. Their returns are stable. You can also use ULIP to invest safely in debt funds without equity allocation.

So, save, invest and grow your wealth without worrying about wealth tax now.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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