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Tax Planning and Management

Unit –IV Wealth tax- Part-1 (Basics)

CONTENTS
• • • • • • • • What is wealth tax Legal framework Charging of wealth tax What is net wealth Who is assessee Valuation date Deemed assets Debts owed by the assessee. • Summary

What is wealth Tax?
• Wealth Tax is a tax on the value of wealth owned by a person, levied under the Wealth Tax Act,1957. • It is one of the direct taxes. • It is annual tax.It is charged for every assessment year commencing from 1st April, 1957 • The tax is levied @ 1 per cent on the amount of wealth as on 31st March of every year, where such amount exceeds Rs.30,00,000.

Legal Framework
• Wealth tax is charged under the provisions of WEALTH TAX ACT,1957 read with WEALTH TAX RULES, 1957

Contd.

WEALTH TAX ACT, 1957
• THIS Act came in to force with effect from 1st April, 1957. • This Act extends to the whole of india. • This Act is divided into 8 chapters and contains 119 (in numbers) sections and 3 Schdules. • This Act has detailed provisions regarding levy and collection of wealth tax.

00. on the relevant valuation date. HUF or Company. determined on the basis of nationality and residential status. who is an assessee shall be charged wealth tax @1% on the amount by which his net wealth. But following are not subject to wealth tax u/s 45: . exceeds Rs. 1957 provides that every Individual.000. 15.Charging Of Wealth Tax • • • • Section 3 of wealth Tax Act.

.Who are not subject to wealth tax? Section 45 of Wealth Tax Act provides that no wealth tax shall be levied in respect of the net wealth of the following persons: – – – – – Section 25 company Any co-operative society Any social club Any political party A mutual fund specified u/s10 (23D) of the Income tax Act.

1957 defines what is ‘Net Wealth’. In simple words. 2(m)] • Section 2(m) of Wealth Tax Act. Net Wealth means: Value of Assets owned by the assessee as on the -----Valuation date Add: Deemed assets u/s 4 Less: Exempt assets u/s 5 Total Less: Debts incurred in relation to assets included above. .What is Net Wealth [sec. Net Wealth Contd.

(for valuation date 31.03.07 previous year is 06-07) In case of HUF and Company On the basis of its Residential status in the previous year ending on the valuation date.Contd. . Basis of computing net wealth [Sec. 6] Net wealth is to be computed : In case of Individual On the basis of his Nationality and Residential status in the previous year ending on the valuation date.

and includes: .2(c) ] • Assessee means a person by whom wealth tax or any other sum of money (I. penalty.Who is an assessee[Sec. interest) is payable under this Act.e.

[2(ea)] . 2(ea)] • The term Assets has been defined under section 2(ea) of wealth Tax Act.WHAT IS AN ASSET?[sec.basically these are unproductive in nature. • This definition covers only 6 types of assets . 1957. • It is to be noted that for the purpose of charging wealth tax “ there must be an asset with in the meaning of sec.

including a Farm House situated within 25 kms from the local limits of the municipality BUT subject to the following exceptions . Any building or land appurtenant thereto whether used for Residential purpose or Commercial purpose or for the purpose of maintaining a guest house or otherwise.1. Building 1.

Any house for residential or commercial purpose. Any house allotted by a company for residential purpose to an employee or an officer or a director who is in full time employment having a gross annual salary of less than Rs. which forms part of stock in trade of the assessee. 2. .Exceptions to the definition of house The following shall not be included in the definition of house: 1.5 lakh. Contd.

5. House used by the assessee for the purpose of his business or profession. 3. Any property in the nature of commercial establishment or complexes .Contd. 4. Any residential property that has been let out for a minimum period of 300 days in the previous year.

A car held as stock in trade. A car used for running on hire 2. .Motor car(whether Indian or foreign) • But following will not be considered as asset 1.2.

. Jewellery. Bullion. silver or any precious metals But Jewellery held as stock in trade is not an asset. or any other article made (wholly or partly) of gold.3. Furniture. utensils.

boats aircrafts used commercial purpose not assets. . and for are • Meaning of commercial purpose (e. Yachts. boats and aircrafts • But yachts.g. using for earning income or held as stock in trade.4.

not being more than 8 km. But subject to the following exceptions: . From the local limits of any municipality or cantonment board .000 according to the preceding published census. Urban Land • Urban land means land situated in any area which is with in the jurisdiction of a municipality and which has a population of not less than 10. Or In any area with in such distance.5. notified by the central government.

The following urban land shall not be treated as asset: • Land on which construction of building is not permissible under any law. • The land occupied by any building which has been constructed with the approval of appropriate authority. • Any land held by the assessee as stock in trade for a period of ten (10) years from the date of its acquisition. • Any unused land held by the assessee for industrial purpose for a period of two years from the date of its acquisition. .

• In case of Company: any cash not recorded in the books of account . whether recorded in books of account or not.000. Cash in Hand • In case of Individual and HUF: cash in hand in excess of Rs. 50.6.

. • 31 March preceding the relevant assessment year is the valuation date.What is valuation date • A very important date in the wealth tax. • All the assets held by the assessee on that day are counted for the purpose of wealth tax.

B Deemed assets which are included in computing net wealth of any assessee (individual.Deemed Assets [sec. HUF. 4] • Deemed assets means those assets which do not belong to assessee but they are included in computing the net wealth of the assessee. Company). Types of deemed assets A Deemed assets which are included in computing net wealth of an individual assessee only. .

 These assets must be transferred without adequate consideration.Conditions for inclusion of Deemed Assets  The individual (transferor) must be the owner of the asset transferred on the date of transfer. .  These assets must be held by the transferee on the valuation date.

„Type A‟ Deemed Assets • Following deemed assets will be included in the net wealth of individual assessee only: .

. directly or indirectly without adequate consideration.1. Asset transferred [Sec. then such asset shall be included in the net wealth of the transferor. EXCEPTION: • If such asset has been transferred in connection with an agreement to live apart then such asset shall not be included in the net wealth of the transferor.4(1)(a)(I) to spouse • If any asset has been transferred by an individual to his/her spouse.

Contd. • „Love and affection‟ is a good consideration but not an „adequate consideration‟. date of transfer and valuation date. I. • The relationship of husband and wife must exist on both the dates. .e.

. • However. the following assets shall not be included in the net wealth of parent and would be taxable in the hands of the minor only. Contd.2. Assets held by a minor child [sec. 4(1)(a)(ii)] • Assets held by a minor child are included in the net wealth of the parent.

– Income from activity involving application of his/her skill. . • Assets held by a minor child suffering from any disability of the nature specified u/s 80U of Income Tax Act. • Assets held by a minor married daughter. • Assets acquired by a minor child out of the following income referred to in proviso to Section 64 (1A) of the Income Tax Act: – Income from manual work done by him. talent or specialised knowledge or experience.Contd.

Contd. • It should be noted that the child must be minor on the valuation date . otherwise. clubbing provision shall not apply. • Question: in which parent‟s income the net wealth of the minor child will be clubbed? .

contd. • If marriage does not subsist: – In the net wealth of that parent who maintains the minor child in the previous year. they will not be included in the net wealth of other parent unless permitted by the assessing officer. . and where any such assets are once included in the net wealth of either parent. • If marriage subsist: – In the net wealth of that parent whose net wealth (excluding the assets of minor child) is greater.

3. directly or indirectly. Again the relationship of husband and wife must exist on the valuation date. Assets transferred to a person or association of persons [sec.4(1)(a)(iii)] • If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person. without adequate consideration for the immediate benefit of the : – Individual himself or herself – His/her spouse. . then such asset will be included in the net wealth of the transferor.

then such asset will be included in the net wealth of the transferor.4. Asset transferred under Revocable Transfer [sec. Contd. directly or indirectly. otherwise than under an IrrevocableTransfer. .4(1)(a)(iv)] • If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person.

Contd. directly or indirectly. or 3. whole or any part of the assets or income from the assets transferred. directly or indirectly. . Meaning of revocable transfer • Following transactions are treated as revocable: 1. or 2. Transfer revocable within a period of six years or during the transferee‟s lifetime. If the transferor derives any benefit. directly or indirectly. over the whole or any part of the assets or income from the assets so transferred. 4. If the transferor has a right to re-transfer. from the assets transferred. If the transferor has a right to re-assume power.

then such asset shall be included in the net wealth of transferor.date of transfer and valuation date. • Imp. without adequate consideration . .4(1)(a)(v)] • If any asset [within the meaning of Sec2(ea)] has been transferred by an individual to his/her son's wife directly or indirectly. It is be noted that relationship between individual (transferor) and daughter-in law must exist on both the date. An Asset transferred to son’s wife [sec.5.

directly or indirectly.4(1)(a)(vi)] • If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person.6. or deferred benefit of the son‟s wife then such asset will be included in the net wealth of the transferor.date of transfer and valuation date . Asset transferred to person or association of person [sec. without adequate consideration for the immediate. • It is be noted that relationship between individual (transferor) and daughter-in law must exist on both the date.

• Example: .Some important facts or points • Asset transferred must be an asset with in the meaning of Sec. 2 (ea) on the „valuation date‟ and not on the date of transfer.

.or • By way of gift. who is a member of a Hindu Undivided Family. or • throwing it into the common stock of the family.7.4(1A)] • Where an individual. Converted Property [Sec. then such property is know as ‘converted property’. converts his individual property in to the property of the family • through the act of impressing such separate property with the character of property belonging to the family. • And the value of such converted property on the valuation date shall be included in the net wealth of the individual.

8. Holder of an impartible estate • The holder of an impartible estate shall be deemed to be the owner of all the properties comprised in the estate. .

individual.Type “B” Deemed Assets • The following assets will be included in the net wealth of any of assessee (i. HUF. or Company) .e.

determined in a manner laid down in Schedule III. . • If a minor is admitted to the benefits of the partnership in a firm. Interest in a firm or Association of Persons [Sec. then the value of his/her interest in the assets of the firm or association.1. the value of the interest of such minor in the firm shall be included in the net wealth of the parent of the minor. 4 (1) (b)] • In case of an assessee who is a partner in a firm or a member of an association of persons.

Then the value of such gift shall be included in the net wealth of the donor.2. . Gift made by means of book entries [Sec.4 (5A)] • Where a gift of money from one person to another person is made by means entries in the books maintained by anyone or more of the following: – Donor – An individual or HUF or firm or an AOP or body of individual with which the donor has business or other relationship.

. as the case may be.3.Building or part allotted under a House Building Scheme[Sec.4 • Where the assessee is a member of a co-operative society. company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society. company or other association. the assessee shall be deemed to be the owner of such building or part thereof.

2 (ea) on the „valuation date‟ and not on the date of transfer.Some important facts or points • Asset transferred must be an asset with in the meaning of Sec. • Any accretions to the asset transferred do not come with in the scope of Section 4. • The asset transferred need not be in the same form in which it was transferred by the transferor. Saraswathi Achi (1980)] . [CWT v.

.Assets exempt from tax [Sec 5] • The burden of proving that assets are exempt from tax is upon the assessee.

General Rule • Any property held assessee under: – A trust – Purpose of religious or charitable purpose • Is exempt from tax – This rule is subject to two special provisions .

– Business is carried on by institution wholly for charitable purposes – Business is carried on by an institution.Special rule 1 – Business Assets • When Business Assets are exempt – Where business is carried by trust wholly for public religious purposes – Business consists of printing and publication of books of a kind notified by Central Govt. fund or trust referred to in clause 23B or 23C of Section 10 of Income Tax Act .

Special rule 2 – Business Assets • When Business Assets are taxable – Any other asset of business and charitable purpose is not exempt .

.Residential Building of Former Ruler • Value of any building used for residence by former ruler of a princely state is exempt from tax.

Former Ruler‟s Jewellery • Jewellery in possession of former ruler of princely state. not being his personal property which has been recognized as heirloom by Central Govt .

. – On leaving such country.Assets belonging to Indian Repatriates • Exemption is available if: – In case assessee is of Indian origin or citizen of India. such person has returned India with intention of permanently residing in India. – Such person was ordinarily residing in foreign country.

• If above conditions are satisfied then: – Money brought by him in India – Value of asset brought by him in India • Is exempt form tax for 7 AY‟s commencing from period such person has returned to India .

metres in area.One House or part of House [Sec 5(vi)] • The following shall be exempt in case of individual or HUF: – A house or part of house – A plot of land not exceeding 500sq. .

Such debt should be still outstanding on the valuation date.Debt owed by the assessee • For calculating net wealth of an assessee debts owed by the assessee shall be deductible subject to the following condition: 1. 2. . as the case may be. Debts located in India or outside India shall be deductible on the basis of nationality and residential status. 3. Liability under wealth tax Act is not a debt. Debs should have been incurred in relation to taxable assets.

HUF. 30. individual.  Wealth tax is charged @ 1% on the net wealth exceeding Rs.  For calculating net wealth exempt assets will not be considered.Summary  For charging Wealth Tax the following points should be kept in mind:  Wealth tax is chargeable only in case of three categories of persons.00. however.000.  Net wealth of the assessee is to be computed as on the valuation date.  For calculating net wealth debts owed by the assessee on the valuation date will be considered. Company. 4 will also be considered.2 (ea).  Asset must be an asset within the meaning of Sec.  For computing net wealth residential status and nationality of the assessee will be considered. namely.  Such asset must belong to the assessee.  Such asset must be held by the assessee or the transferee under section 4 on the valuation date. deemed asset under sec. .

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