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

What is Wealth Tax, and Who is Liable to Pay it?

Wealth tax was a levy on the total value of assets (minus liabilities) owned by individuals, Hindu Undivided Families (HUFs), and companies in India. For those who were liable when it was active, wealth tax only applied if your net wealth exceeded Rs. 30 lakh on a specific date (usually March 31st). If you did exceed the threshold, a flat tax rate of 1% was applied only to the amount exceeding Rs. 30 lakh.

There was also a residency component. Resident Indians were liable for wealth tax on all their assets worldwide, while Non-Resident Indians (NRIs) only paid wealth tax on assets they held within India.

How does Wealth Tax Work?

Wealth Tax operates through a systematic process of net wealth calculation. Individuals, Hindu Undivided Families (HUFs), and companies evaluate their net wealth by totaling the value of their assets, including properties, stocks, cash, and other holdings, and then deducting any liabilities such as loans or mortgages.

The assessment of net wealth typically occurs on a specific valuation date, often set as March 31st of each year. If the calculated net wealth surpasses the threshold of Rs. 30 lakhs on this valuation date, the wealth tax becomes applicable. The taxable amount under the wealth tax system is determined solely on the portion of net wealth exceeding the Rs. 30 lakhs threshold. A fixed rate of 1% is then applied to this surplus amount, representing the tax rate levied on the wealth exceeding the threshold.

Also, the residential status of the taxpayer plays a role in determining the scope of wealth taxation. Resident Indians are subject to wealth tax on their global assets, whereas Non-Resident Indians (NRIs) are only liable for wealth tax on assets situated within India.

This systematic approach ensures a standardized method of wealth taxation, aiming for fairness and equitable distribution of tax burdens among different classes of society.

How to Calculate Net Wealth

Calculating net wealth involves several steps to determine the overall financial position of the assessee. Here's how to calculate net wealth:

• Value of Assets on Valuation Date: Begin by assessing the total value of all assets belonging to the assessee as of the valuation date. This includes properties, investments, cash holdings, jewelry, and any other valuable possessions.
• Add Deemed Wealth: It's important to include any assets that are considered deemed wealth according to tax regulations. This ensures a comprehensive calculation and a confident understanding of your financial position.
• Less Exempt Assets: Deduct the value of assets that are exempt from wealth tax. These could be assets specifically exempted by tax laws, such as certain types of agricultural land or properties used for religious or charitable purposes.
• Less Debts Incurred in Relation to Assets: Subtract any debts or liabilities that are directly related to the assets. This may include outstanding mortgages, loans taken for the acquisition of assets, or any other debts secured against specific assets.
• Total: Once all the above steps are completed, the total remaining value represents your net wealth. This figure is not just a number but the basis for determining whether the wealth tax is applicable and, if so, the amount of tax owed based on the threshold and tax rate specified by tax regulations.

Exempted Assets and the Entities

Entities that were not liable to wealth tax in India include:

• Companies registered under Section 25 of the Companies Act: This applies to companies established for charitable or religious purposes.
• Co-operative societies: These are member-owned businesses that operate democratically.
• Social clubs: These are organizations formed for social interaction and recreation.
• Political parties: Wealth tax was not levied on political parties.
• Mutual Funds specified under Section 10(23D) of the Income-tax Act: These are investment vehicles that pool funds from investors and invest them in securities.

Exempt Assets:

• Primary Residence up to a certain area (typically 500 square meters).
• Agricultural land used for farming activities.
• Productive assets investments like shares, bonds, and mutual funds.
• Basic personal belongings likely had an exemption value.
• Property held for charitable and religious purposes.
• Interest in coparcenary property HUF (Hindu Undivided Family)
• Property used for business or rented out for a significant part of the year (e.g., 300 days).