How is Wealth Tax Calculated?

Wealth tax can be defined in several ways, depending on the level of detail desired. It is a direct tax levied on the wealth such as investments, assets like cash and property. 

Table of Contents

• What is Wealth Tax?
• Wealth Tax in India
• How is Wealth Tax Levied?
• How is Wealth Tax Calculated?
• Provision of Wealth Tax

What is Wealth Tax?

Wealth tax is also known as capital tax or equity tax. It is a tax levied on the assets of the entity's holding or on the net worth. This involves total value of personal assets including bank deposits, cash, assets in insurance and pension plans, real estate, financial securities and personal trusts. It does not include the liabilities such as mortgages or other debts from total assets. 

Wealth tax is imposed on the net value of the assets of individuals or entities that exceed a specific threshold. It is calculated as the total market value of every asset excluding liabilities or debts. Through wealth tax, the government can generate revenue, and prevent wealth inequality as well as excessive wealth concentration.

Wealth Tax In India

In India, the central government levies wealth tax on individuals and companies. The wealth tax in India is set at a flat rate and is charged on the assets of individuals who come under a set wealth threshold. It is frequently known as net wealth tax. This act is regulated as per the Wealth Tax Act, of 1957. Following items are defined as “assets” as amended by Finance Act, 2023: 

• Any building or land apparteant thereto, whether used for commercial or residential purposes or to maintain a guest house or otherwise. This includes farm house situated within 25 kilometers of the local limits of any Cantonment Board and municipality. However, the following mentioned buildings or land appurtenant thereto are not included:
• A house exclusively for residential purposes and is allotted by a company to an employee/ officer/director in wholetime employment with a gross annual salary of less than Rs.10,00,000.
• Any house (residential or commercial) forming part of stock-in-trade of the taxpayer.
• Any house occupied by taxpayer for business or professional use.
• Residential property that has been let-out for a minimum period of 300 days in the previous year.
• Any property of commercial establishments or complexes. Motor cars (other than those used by the taxpayer in business of running them on hire or held as stock-in-trade).
• Jewellery, utensils, bullion, furniture, or other articles made wholly or partly of silver, gold, platinum or other precious metal or alloy containing one or multiple precious metals. This category does not include any of the above items held as stock-in-trade by taxpayer.
• Boats, yachts and aircrafts (except those used by taxpayer for commercial purposes).
• Urban land except the following :
• Land on which construction of a building is not permissible as per any law for the time being in force
• Land on which construction is done with approval of the appropriate authority
• Unused land held by taxpayer for industrial purposes for two years from the date of its acquisition
• Land held by taxpayer as stock-in-trade for ten years from the date of its acquisition
• Land classified as agricultural land as per the Government records and is being used for agricultural purpose

Is Wealth Tax Still Applicable in India?

Wealth Tax Act, 1957 has been abolished w.e.f. 01.04.2016. 

Why Wealth Tax was Abolished in India?

Wealth tax was abolished since cost for tax recovery was higher than the benefit.

How is Wealth Tax Levied?

Unlike income tax, wealth tax is levied on the wealth of taxpayers. According to the Wealth Tax Law, wealth tax is levied on the following:

• Individual
• Company
• Hindu Undivided Family (HUF)

Who Do Not Have to Pay Wealth Tax?

Anyone else except for the above-mentioned is not required to pay wealth tax. The following entities are not required to pay wealth tax:

• Reserve Bank of India
• Co-operative society
• Social clubs
• Political parties
• Companies registered under the Companies Act (Section 25)
• Mutual Fund mentioned under section 10(23D) of the Income-tax Act

The assets of partnership firms are charged to tax in the hands of firm partners as 'interest in partnership firm'. When a minor starts gaining benefits of partnership in a firm, it is included in the net wealth of his/her parents. Likewise, the association of persons are not required to pay wealth tax. However, the assets of the association of persons are charged to tax at the hands of its members as 'interest in partnership firm'. 

How Wealth Tax is Calculated?

Wealth tax is levied on assets value that are owned by taxpayers on the valuation date i.e. 31st March of the relevant year. It is paid on assets that are owned by taxpayer on the valuation date. However, in the below-mentioned cases, assets held by other persons are included within the net wealth of taxpayer, i.e., assets of other persons are clubbed along with the taxpayer's wealth. The value of an asset (except cash) that is liable to wealth-tax is determined as prescribed in the Valuation Rules (i.e., rules mentioned in Schedule III of the Wealth-tax Act).

Threshold For Wealth Tax

Any HUF, individual or company with net worth exceeding rupees 30 lakh on the date of asset valuation is subject to wealth tax at the rate of 1% of the amount above 30 lakhs.

Who Benefits From Wealth Tax?

Wealth tax is imposed on richer section of society, it reduces the burden on low-income taxpayers in India. This reduces the economic disbalance between different sections of society. Hence, a balance is maintained within the society.  

Provisions of Wealth Tax

The following are the provisions of wealth tax:

• Every person with net wealth above Rs. 30,00,000 on valuation date must file return of net wealth.
• Due dates to file the return of net wealth are the same as due dates prescribed to file the return of income under section 139 of Income-tax.
• Act. In case the taxpayer needs to undergo audit as per Income-tax Act, due date is 30th September and otherwise, the due date is 31st July.
• A belated or revised return must be filed within one year from end of assessment year or before the completion of assessment (whichever comes earlier).
• Interest at the rate of 1% per month or part of the month is levied in case of delay in filing return of net wealth.
• In case the taxpayer fails to pay any part of tax, the entire tax, interest or both, he/she will be deemed to be an assessee-in-default in respect of tax, interest or both.
• If amount is not paid within 30 days or within the time specified in the notice of demand, taxpayer will have to pay interest at the rate of 1% per month or part of month comprised during the period starting from the expiry of the day. This is specified during the demand notice for payment and till the date on which the amount is paid.
• Penalty can be between 100% and 500% in case of wealth concealment.
• Apart from levy of penalty for various defaults, law provides for prosecution for defaults. This includes willful attempt for tax evasion, not filing wealth return, failure to produce accounts, records; and false statement in verification, etc.