Pay for being rich
Babar Zaidi
January 4, 2010
"Most people are not even aware that they fall within the ambit of the Wealth Tax Act," says Delhi-based financial consultant Surya Bhatia. Wealth tax is payable on residential real estate, jewellery, art and artefacts, motor cars, yachts, aircraft and hard cash. The tax is one per cent of the combined value of these assets exceeding Rs 30 lakh. So, if a person has taxable wealth of Rs 50 lakh, he will have to shell out Rs 20,000 as wealth tax every year. Unlike income tax, wealth tax is payable every year for the same assets. The idea is to tax unproductive, non-essential and idle assets. This is the reason commercial property, bonds, fixed deposits, stocks, Ulips, gold funds, mutual funds, even your savings account bank balance, are exempt from wealth tax.
There is a stiff penalty for evading wealth tax. Incorrect declaration of wealth can invite a fine of up to 500 per cent of the evaded tax. One can also be jailed for up to seven years if the tax due is over Rs 1 lakh. The tax filing dates are the same as for income tax. Delayed filing can result in a penalty of Rs 100- 200 per day. Says Shishir Jha, commissioner of income tax and CBDT spokesperson, "It is easy to detect wealth tax evasion. The undervaluation of existing assets can be proved."
There are many exemptions for taxable assets. For instance, a single property is exempt from wealth tax. A house given on rent is also not taxable. Besides, an outstanding loan taken to purchase the asset (house, car, gold) has to be deducted from the taxable wealth. If a person takes a loan of Rs 6 lakh to buy a car worth Rs 8 lakh, the taxable wealth will be the depreciated value of car minus the outstanding loan.
Though wealth tax collections have risen sharply in the past five years, from Rs 144 crore in 2004- 05 to Rs 385 crore in 2008- 09, they pale in comparison to the huge wealth created by stock markets and real estate in the past six years. Sure, stocks and commercial property are exempt from wealth tax, but second houses, jewellery and gold are not.
Investors have poured a lot of money in real estate in the past five years. According to a recent survey of high net worth investors ( HNIs) by Barclay's Wealth, India is among the top five property investment destinations in the world.
Almost 30 per cent of the HNIs surveyed had allocated more than half of their portfolios to real estate.
Experts say that most investors in real estate have no clue about the tax implications of buying a second property. Residential builtup property does not attract wealth tax only if it is rented for at least 300 days in a year.
However, it can be a double whammy if the house is vacant. Firstly, the owner has to pay tax on the ' deemed' rental income at the prevailing market rate. Secondly, the value of the house is added to his net taxable wealth. " This is why savvy investors prefer to put money in commercial real estate, which does not attract wealth tax," says Sudhir Kaushik, director of tax filing portal Taxspanner. com.
You cannot escape wealth tax if you buy property in the name of a spouse or minor child. Any asset ( property, jewellery, motor car) transferred to a spouse or minor child without adequate consideration attracts ' clubbing' provisions. The value of the asset, or any income from it, is clubbed with that of the giver.
The silver lining is that the owner is free to choose the property that he wants exempted from wealth tax. He is also free to change the option later.
The valuation of wealth is carried out at the end of the financial year. If a person sells the asset before 31 March, its value is not included in the net taxable wealth. This is a double- edged sword. If he buys an asset just a day before the valuation, its value will be included.
If your wealth tax liability is giving you a headache, there's some good news around the corner. The new Direct Taxes Code proposes to raise the threshold limit of assets for wealth tax to Rs 50 crore and reduce the tax to 0.25 per cent.
However, all exemptions may be removed, thus simplifying the procedure to calculate tax. Even so, experts feel the threshold limit is too high and should put over 95 per cent of Indians beyond the ambit of wealth tax.
So, if the new code is cleared, most Indian investors may not have to lose sleep over wealth tax.
Pay for being rich
shailesh agarwal (professional accountant) (7642 Points)
06 January 2010
CAclubindia
