Wealth Tax : Examples, Provisions, Exemptions, Calculation & Rates

What is Wealth Tax?

A wealth tax is a tax charged on the net worth of an assessee. A wealth tax also known as net worth tax, capital tax, or equity tax falls under the category of direct tax as it is charged on the total value of assets held by an entity. A wealth tax is imposed on a wide range of assets including cash, bank balance, real estate, stocks, bonds, jewelry, pension plans, money funds, and other valuable properties. A wealth tax was charged at a rate of 1% on earnings of over ₹30 lakh p.a. earlier, but after the 2015-16 Union Budget, a surcharge from 2% to 12% is levied according to the worth of an assessee. However, it should be noted that assessees who are liable to pay wealth tax include Individuals, Companies, and Hindu Undivided Families (HUF). A partnership is not liable to pay this tax because the assets of the firm are taxable in the hands of partners individually. Moreover, cooperative societies, social groups, political parties, the Reserve Bank of India (RBI), and companies under section 25 of the Companies Act shall not be liable to pay a wealth tax.

Geeky Takeaways:

• A wealth tax is a direct tax levied on the net value of the assets held by an assessee on 31st March of every year.
• Wealth Tax is charged on a wide range of assets like cash, bank, real estate, pension funds, vehicles, etc.
• In India wealth tax was governed by the Wealth Tax Act 1957 and a tax of 1% was charged on earnings of over ₹30 lakh p.a until 2015. After that surcharge is levied instead of wealth tax at a rate starting from 2%.
• Assessees liable to pay wealth tax include only, Individuals, Companies, and HUFs.
• The aim of levying a wealth tax was to reduce the inequalities between the rich and the poor.

Example of Wealth Tax

Let’s assume that Ravi who is an individual owns assets worth ₹10,00,000 and is liable to pay wealth tax at a rate of 20%. The total liability of Ravi is ₹2,00,000. Then,

The Net Wealth of Ravi = ₹10,00,000 – ₹2,00,000 = ₹8,00,000

so, Ravi shall pay 20% wealth tax on his net wealth i.e., 20% of ₹8,00,000 = ₹1,60,000

Significance of Wealth Tax

Besides being a source of revenue for the government, a wealth tax is of immense significance:

1. Promotes Wealth Equality: The main purpose of a wealth tax is to reduce the gap between the poor and the rich and promote equality in wealth distribution by imposing more taxes on the assessee who significantly owns assets of higher value. It further leads to the re-distribution of wealth that ensures social well-being and promotes economic welfare.

2. Source of Revenue: A wealth tax is a source of revenue for the government that is used to finance public expenditure and fund the major projects of the government like infrastructural development, building schools, hospitals, dams, roads, etc. Further, wealth tax reduces the dependence of the government on income tax for revenue generation.

3. Progressive Taxation: A wealth tax is based on the concept of progressive taxation which ensures fairness in tax structure. Under progressive taxation, more taxes are imposed on those who own more wealth. This promotes fairness and trust among the public in taxation policy.

4. Economic Development: A wealth tax promotes economic growth by re-distributing the wealth equally and allocating the resources efficiently. The social gap between the rich and the poor is reduced eliminating poverty and promoting progress.

5. Controlling Externalities: A wealth tax helps the government in controlling negative externalities like wealth concentration, political influences, social instability, unequal opportunities, and so on.

Provisions of Wealth Tax in India

A provision of a wealth tax in India is levied by the Income Tax Department of India and a wealth tax is governed under the Wealth Tax Act, 1957. However, it is important to note that a wealth tax was abolished after the declaration of the 2015-16 Union Budget. Now, a surcharge is levied instead of a wealth tax in India.

Basic Provisions in Wealth Tax

The basic provisions mentioned under the Wealth Tax Act are:

1. Taxable Entities: A wealth tax applies to Individuals, Hindu Undivided Families (HUFs), and Companies. In the case of a partnership firm, the assets of the firms are taxable in the hands of the partners individually.

2. Exempted Entities: Some entities including cooperative societies, social groups, political parties, the Reserve Bank of India (RBI), and companies under section 25 of the Companies Act are exempted from the list of wealth tax payees.

3. Taxable Assets: A provision of wealth tax covers a wide range of assets like cash, bank, and house property except self-occupied, land, vehicles, jewelry, etc.

4. Exempted Assets: Some categories of assets like investment in shares and securities, assets used in business or profession, assets held for charitable or religious purposes, residential house property, etc are exempted under a wealth tax.

5. Tax Rate: An assessee who has crossed a threshold of ₹30 lakhs p.a. shall pay 1% wealth tax on such amount.

6. Valuation of Assets: A provision of wealth tax lays down the method of valuation of assets. Different rules of valuation for different categories of assets have been laid down like the value of immovable property is calculated based on the market value assessed by a registered valuer.

Wealth Tax Exemptions

1. Productive assets like investment in shares, securities, and mutual funds.

2. Assets like stock-in-trade, building, machinery, plant, and furniture used for business or profession.

3. Assets held by Trusts, Charitable Units, or Religious Institutions and used for charitable purposes and religious acts.

4. Individuals are allowed to claim exemption on one residential house or part of a residential house from wealth tax

5. Agricultural Land used for agricultural activities is subject to an exemption under wealth tax.

6. Jewelry and other specific assets like artworks and archaeological collections.

7. Houses/plots of the area below 500 sq. Mts.

Calculation of Wealth Tax

To calculate wealth tax follow the steps mentioned below:

1. Determine the Total Assets: Firstly identify all the assets owned by an assessee and then determine the total value of those assets as per the method prescribed under the provision of the Wealth Act.

2. Calculate Total Debt: The second step is to determine the value of the total liability of an assessee including mortgages, loans, and other debts.

3. Ascertain Net Wealth: The value of total assets and total debts are required to find out the net wealth of an assessee. To calculate the net wealth simply deduct total debt from total assets.

Net Wealth = Total Assets – Total Debt

4. Calculate Tax Liability: To calculate a tax liability it is important to know the rate of tax applicable. A wealth tax is a progressive tax that increases with an increase in net wealth. Calculate the wealth tax liability by multiplying the net wealth by the applicable tax rate.

5. Apply Exemptions and Deductions: Consider the exemptions and deductions applicable to ascertain the final tax liability of an assessee. Exemptions and deductions reduce the tax liability.

6. Filing Tax Return: The last step is to file the wealth tax return with the tax authorities to provide all the relevant information related to assets, liabilities, and computation of wealth tax liability.

Wealth Tax Rates

A wealth tax of 1% is levied on the total net income of an Individual, HUF, or Company if it exceeds the amount of ₹30 lakhs p.a. However, after the abolishment of the Wealth Act, Union Budget 15-16 has imposed a surcharge of 2% to 12% on individuals who have an income above ₹1 crore and companies having an income of ₹10 crore or above.

Why Wealth Tax has been Abolished?

1. High Administrative Cost: The cost related to administration, implementation, and enforcement was more than the revenue generated through a wealth tax. This was the primary reason to abolish the wealth tax.

2. Complexity: Calculation of net wealth includes the valuation of various assets according to the provisions of the act at the end of every financial year. The process was complex for the taxpayers and further increased the burden on their shoulders. Besides this, compliance and enforcement complexity make the administration of wealth tax difficult on the part of the tax authorities.

3. Restricts Economic Growth: Under wealth tax, accumulated assets were subject to taxation that demotivated the public to invest or save more. Low investment and saving hampered capital formation which in return adversely affects the economic development of the nation.

4. Lack of Awareness: Wealth tax contributed very little towards revenue generation for the government because the major party of an economy was unaware of the concept of wealth tax. Such lack of awareness was the main reason behind the non-filing of wealth tax returns by the public.

5. Re-structuring Tax Regime: The government abolished wealth tax to make the taxation structure simple, easy and payer-friendly to promote the easy collection of taxes, increase capital formation, and economic development.

Pros of Wealth Tax

1. Promotes Equality: A wealth tax aims to promote wealth equality in society by imposing taxes on those who own higher wealth. This helps in reducing the financial gap between the rich and the poor, re-distribution of wealth, and efficient allocation of resources.

2. Diversified Source of Revenue: Wealth tax diversifies the source of revenue for the government. The government no longer had to be dependent on income tax and goods for financing its public expenditures.

3. Progressive Tax Structure: Wealth tax was based on the concept of progressive taxation which means higher rates of taxes were charged to those who owned significantly higher assets. This concept of taxation ensured fairness and equality.

4. Promotes Economic Stability: Wealth tax led to the re-distribution of wealth and efficient allocation of resources that ensured social mobility of resources. Ease of resource allocation and mobility promotes social stability and growth.

Cons of Wealth Tax

1. High Administrative Cost: The main disadvantage of wealth tax was that the cost of administration and enforcement was much higher than the revenue generated through wealth tax. This further increases the financial burden of the government.

2. Administrative Complexity: Ascertaining net wealth to calculate the wealth tax liability was a complex process. Valuation of different assets at the end of every financial period according to the rules of taxation policy increased the burden on the shoulders of both the taxpayers and the tax authorities.

3. Reduces Capital Formation: Wealth tax discourages the public from saving and investing more due to the heavy taxes imposed on assets. This adversely affected the capital formation and economic growth of the nation.

4. Tax Evasion and Avoidance: The major section of the society wasn’t aware of the wealth tax regime. Lack of knowledge led to the non-filing of wealth tax returns, helping liable taxpayers to easily avoid taxes behind the curtain of unawareness.

Difference between Income Tax and Wealth Tax

Basis	Income Tax	Wealth Tax
Focus	Levying taxes on income earned during a specific period	Levying taxes on accumulated wealth or assets owned on a specific date
Base of calculation	Taxable annual income of an assessee	Net wealth or assets owned by an assessee
Applicable Assessee	All such persons who is liable to pay tax under provisions of the Income Tax Act, 1961	Individuals, Companies, and HUFs
Tax Rates Structure	Progressive tax rate based on income earned	Progressive tax rate based on wealth owned
Frequency	Levied annually on income earned during the previous year	Levied annually based on the value of assets on a specific valuation date (generally 31st March)
Charged on	Salaries, wages, business profits, capital gains, interest income, etc	Real estate, bank balance, cash, jewelry, etc.
Governing Act	Income Tax Act, 1961	Wealth Tax Act, 1957

Frequently Asked Questions (FAQs)

What is wealth tax?

Wealth tax is a direct tax levied on the net wealth or net value of assets owned by individuals, companies, or HUFs.

What types of assets are subject to wealth tax?

Assets subject to wealth tax may include real estate (other than primary residence), cash holdings, bank balance, jewelry, vehicles, valuable artwork, and other tangible and intangible assets.

How is wealth tax calculated?

Wealth tax is typically calculated as a percentage of the net wealth exceeding a specified threshold. The tax rate and thresholds vary depending on the country’s tax laws.

Why was the wealth tax abolished in India?

Wealth tax abolition reasons include low revenue yield, administrative complexity, concerns about its impact on capital formation and investment, and alignment with global tax trends favoring simplification and economic growth.

How does wealth tax differ from income tax?

Wealth tax is based on the total value of assets owned, whereas income tax is based on the earnings or income received during a specific period. Wealth tax targets accumulated assets, while income tax targets annual income flows.