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What is Wealth Tax in India & why was it abolished?

Ashish M. Shaji

| Updated: Jun 02, 2021 | Category: Taxation

What is Wealth Tax in India & why was it abolished?

India’s tax system involves different forms of taxes, and one of them is the Wealth tax. However, this tax has been abolished. This form of taxation is imposed on the richer section of society. In this article, we shall understand the Components and applicability to pay wealth tax in India.

Background

As stated at the beginning, wealth tax is imposed on richer section, and the objective behind this is to bring parity amongst taxpayers. However, this tax was abolished in 2015 due to the simple reason that the cost incurred for recovering taxes was more than the benefit. Therefore as an alternative to this tax, the finance minister hiked the surcharge from 2% to 12% for the super-rich section of the society. The super rich section includes individuals with an income of more than 1 crore rupees and companies with an income of more than 10 crore rupees.

In the budget 2019, the finance minister significantly hiked the surcharge rates, which stands at 15% for income between 1 to 2 crore rupees, 25% for income between 2 to 5 crore rupees and 37% surcharge for income above 5 crore rupees.

Liability to pay wealth tax in India

It may be noted that this form of tax applies to the following:

 Liability to pay wealth tax in India

The deciding factor for wealth tax applicability is the residential status. The rule is that the resident Indians are subject to wealth tax on their global assets. However, in case of NRI, they fall under the purview of wealth tax for assets in India. 

Calculation of Wealth Tax in India

Wealth tax was calculated on market value of assets owned regardless of whether they yielded returns or not. All individuals and HUF with a net wealth of more than 30 lakh rupees were required to pay this tax.

This tax was based on the assets valuation as on March 31 and, therefore, would be applicable on assets acquired at the end of a financial year. However, those assets that were sold during the year don’t fall under the ambit of wealth tax[1].

Wealth tax was calculated at 1 percent on net wealth more than 30 lakh rupees.

Wealth tax in India: Components of Wealth

Assets covered under Wealth Tax-

  • Any building or land apartment, whether used for residential/other purposes but doesn’t include the following:
    • House allotted by the employer to be used exclusively for residential purposes where the gross total salary of the assessee is below 10 lakh rupees;
    • House that forms a part of stock in trade;
    • House occupied by the assessee for business/professional purpose;
    • Residential property let out for a minimum of 300 days in the previous year;
    • Property in the nature of commercial establishment or complex.
  • Motorcars, apart from those that are used for running them on hire or those that are held as stock.
  • Jewellery, bullion, furniture, or other articles made entirely or partly of gold, silver, platinum or such other precious metals.
  •  Yachts, boats and aircraft apart from those that are used for commercial purposes.
  • Urban land located in the specified area apart from-
    • Those classified as agricultural land and used for such purposes;
    • Those in which construction of building is not permitted;
    • Land occupied by building that was built with the approval from the relevant authority;
    • Unused land held by the assessee for the industrial purposes for 2 years period from the date of acquisition;
    • Land held by assessee as stock in trade for more than 10 years from the acquisition date.
  • Cash in hand of more than 50k rupees.

Assets that are not considered as part of wealth for wealth tax computation-

  • Those property held under trust for the purpose of charitable purposes;
  • Interest in coparcenaries property of HUF;
  • Jewellery in possession of ruler not being his personal property;
  • Money/asset bought by a person of Indian origin;
  • A particular house or part of that house or plot of land (not exceeding 500 sq. meter) in case of an individual/HUF.

Why was Wealth Tax abolished in India?

The following are the primary reasons for its abolishment:

  • To simplify tax procedures;
  • Due to the lack of ease of doing business;
  • To reduce the scope of taxpayers taking advantages of loopholes;
  • Due to expensive allocation;
  • To increase the revenue of the government;
  • To reduce the administrative burden;
  • For improved reporting;
  • To prevent leakage of tax;
  • Due to lack of awareness of wealth tax in India;
  • Incurs high collection costs but provides low yield.

Conclusion

Its curtains for wealth tax in India as it was abolished in India by the central government as it had high collection costs but low yield. Wealth tax has been replaced by the levy of an additional surcharge.

Read our article: Corporate Tax in India: Everything you need to know

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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