Understanding Wealth Tax in India

Provisions of Wealth Tax in India

The provisions passed out by the Income Tax Department says-

“Income tax is levied on the taxpayer's income, whereas wealth tax is levied on the taxpayer's wealth. Wealth tax is governed by the Wealth Tax Act 1957. In this part, you can gain knowledge of various provisions of the Wealth Tax Act of 1957. Here, it is to be noted that the Wealth-tax Act of 1957 was abolished.

Basic Provisions

Following are the basic provisions of Wealth tax Law that are to be kept in mind-

Wealth tax is levied on the following persons only-

• An individual
• A Hindu undivided family (HUF)
• A company

A partnership firm is not liable to wealth tax, but the assets of the partnership firm are charged to tax in the hands of the partners of the firm in the form of “Interest in partnership firm”.

In other words, a partnership firm is not liable to wealth tax, but the value of the assets held by the firm is to be ascertained, and this value will be distributed amongst the partners of the firm and will be charged to tax in the hands of the partners.

However, where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such a minor in the firm shall be included in the net wealth of the minor's parent.

Similarly, an association of persons (not being a cooperative housing society) is not liable to wealth tax. Still, the assets of the association of a person are charged to tax in the hands of its members in the form of an “Interest in a partnership firm.”

Wealth tax is levied on the net wealth owned by a person on the valuation date, i.e., 31st March of every year. Wealth tax is levied at 1% on the net wealth of more than Rs. 30,00,000.

Entities That Are Not Liable to Wealth-tax

The following entities are not liable to pay wealth tax-

(a) any company registered under section 25 of the Companies Act

(b) any cooperative society

(c) any social club

(d) any political party

(e) a Mutual Fund specified under section 10(23D) of the Income-tax Act

(f) Reserve Bank of India

Wealth Tax Exemptions

• Investments in securities
• Houses/plots of the area below 500 sq. Mts
• Houses that are taken as places of business/profession
• Residential properties have been rented for 300 days or more in a year
• Vehicles that are for hire
• Stock-in-trade business assets.

Calculation of Wealth Tax

Wealth tax is calculated when the total net income of an individual, HUF, or company exceeds the amount of ₹30 lakhs. A tax of 1% is levied on the amount. 

Why Has Wealth Tax been Abolished?

Here are the key reasons why wealth tax has been abolished-

• Simplifying Tax

In order to make the existing tax regulations simple, transparent and seamless, the Indian government decided to abolish the wealth tax. It was fairly complex.

• Enhance the Collection of Revenue 

Since the wealth tax was replaced with a surcharge, the government estimated to earn increased revenue than it was before.

• Complexity and Burden of Administration

In order to compute their net wealth, the wealth taxpayers had to value their assets according to the rules applicable to wealth tax. Even for many assets like jewellery, the taxpayers were supposed to get in touch with a registered valuer to avail of a valuation report.

• Lack of Awareness

Only a small section of people had knowledge about what wealth tax was all about. This resulted in the non-filing of wealth tax by a huge margin.