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Tax Planning and Management
UnitIV
Wealth tax- Part-1 (Basics)
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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
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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 ofwealth as on 31st March of every year, where
such amount exceeds Rs.30,00,000.
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Legal Framework
Wealth tax is charged under the provisions
of WEALTH TAX ACT,1957 read with
WEALTH TAX RULES, 1957
Contd.
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WEALTH TAX ACT, 1957
THIS Act came in to force with effect from1st April, 1957.
This Act extends to the whole of india.
This Act is divided into 8 chapters andcontains 119 (in numbers) sections and 3Schdules.
This Act has detailed provisions regardinglevy and collection of wealth tax.
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Charging Of Wealth Tax
Section 3 of wealth Tax Act, 1957 provides that every
Individual,
HUF or
Company,who is an assessee shall be charged wealth tax @1% onthe amount by which his net wealth, determined on the
basis of nationality and residential status, on the relevantvaluation date, exceedsRs. 15,00,000.
But following are not subject to wealth tax u/s 45:
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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.
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What is Net Wealth [sec. 2(m)]
Section 2(m) of Wealth Tax Act, 1957 defines whatis Net Wealth. In simple words, Net Wealthmeans:
Value of Assets owned by the assessee as on the
Valuation date
------
Add: Deemed assets u/s 4
Less: Exempt assets u/s 5
TotalLess: Debts incurred in relation to assets included
above.
Net Wealth
Contd.
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Contd.
Basis of computing net wealth [Sec. 6]
Net wealth is to be computed :
In case of Individual
In case of HUF and
Company
On the basis of his
Nationality and Residential
status in the previous yearending on the valuation
date. (for valuation date
31.03.07 previous year is
06-07)
On the basis of its
Residential status in the
previous year ending on
the valuation date.
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Who is an assessee[Sec.2(c) ]
Assessee means a person by whom wealth
tax or any other sum of money (I.e.
penalty, interest) is payable under this Act,and includes:
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WHAT IS AN ASSET?[sec. 2(ea)]
The term Assets has been defined undersection 2(ea) of wealth Tax Act, 1957.
This definition covers only 6 types ofassets ,basically these are unproductive innature.
It is to be noted that for the purpose of
charging wealth tax there must be anasset with in the meaning of sec.[2(ea)]
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1. Building
1. Any building or landappurtenant thereto
whether used for
Residential purpose or
Commercial purpose or
for the purpose ofmaintaining a guest
house or otherwise,
including a Farm House
situated within 25 kmsfrom the local limits of
the municipality BUT
subject to the following
exceptions
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Exceptions to the definition of house
The following shall not be included in the definitionof house:
1. Any house allotted by a company for
residential purpose to an employee or an officeror a director who is in full time employmenthaving a gross annual salary of less than Rs.5lakh.
2. Any house for residential or commercialpurpose, which forms part of stock in trade ofthe assessee.
Contd.
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Contd.
3. House used by the assessee for the
purpose of his business or profession.
4. Any residential property that has been letout for a minimum period of 300 days in
the previous year,
5. Any property in the nature ofcommercialestablishment or complexes
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2.Motor car(whether Indian or
foreign) But following willnot be considered as
asset
1. A car used for
running on hire
2. A car held as stock
in trade.
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3. Jewellery, Bullion, Furniture, utensils,or any other article made (wholly or
partly) of gold, silver or any precious
metals
But Jewellery held
as stock in trade is
not an asset.
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4. Yachts, boats and aircrafts
But yachts, boats and
aircrafts used for
commercial purpose are
not assets.
Meaning of commercial
purpose (e.g. using for
earning income or held asstock in trade.
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5. Urban Land
Urban land means land situated
in any area which is with in thejurisdiction of a municipalityand which has a population ofnot less than 10,000 according to
the preceding published census.Or
In any area with in suchdistance, not being more than 8km. From the local limits of anymunicipality or cantonment
board , notified by the centralgovernment.
But subject to the followingexceptions:
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The following urban land shall not be treated as
asset:
Land on which construction of building is notpermissible under any law.
The land occupied by any building which has
been constructed with the approval of appropriateauthority.
Any unused land held by the assessee forindustrial purpose for a period of two years from
the date of its acquisition. Any land held by the assessee as stock in trade
for a period of ten (10) years from the date of itsacquisition.
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6. Cash in Hand
In case of Individual and
HUF: cash in hand in
excess of Rs. 50,000,
whether recorded inbooks of account or not.
In case of Company: any
cash not recorded in thebooks of account
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What is valuation date
A very important date in
the wealth tax.
All the assets held by the
assessee on that day arecounted for the purpose
of wealth tax.
31 March preceding the
relevant assessment yearis the valuation date.
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Deemed Assets [sec. 4]
Deemed assets means those assets which do not belong
to assessee but they are included in computing the net
wealth of the assessee.
Deemed assets which
are included in
computing net wealth
of an individual
assessee only.
Types of deemed assets
Deemed assets which are
included in computing
net wealth of any
assessee (individual,
HUF, Company).
A B
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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 transferred without
adequate consideration.
These assets must be held by the transfereeon the valuation date.
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Type A Deemed Assets
Following deemed assets will be included
in the net wealth of individual assessee
only:
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1. Asset transferred to spouse[Sec.4(1)(a)(I)
If any asset has been
transferred by an individual to
his/her spouse, directly or
indirectly without adequate
consideration, then such assetshall be included in the net
wealth of the transferor.
EXCEPTION:
If such asset has been
transferred in connection withan agreement to live apart then
such asset shall not be included
in the net wealth of the
transferor.
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Contd.
The relationship of husband and wife must
exist on both the dates, I.e, date of transfer
and valuation date.
Love and affection is a good
consideration but not an adequate
consideration.
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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.
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.
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Contd.
Assets held by a minor child suffering from anydisability of the nature specified u/s 80U ofIncome Tax Act,
Assets held by a minor married daughter.
Assets acquired by a minor child out of thefollowing income referred to in proviso toSection 64 (1A) of the Income Tax Act:
Income from manual work done by him, Income from activity involving application of his/her
skill, talent or specialised knowledge or experience.
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Contd.
It should be noted that the child must be
minor on the valuation date , otherwise,
clubbing provision shall not apply.
Question:
in which parents income the net wealth of
the minor child will be clubbed?
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contd.
If marriage subsist: In the net wealth of that parent whose net wealth (excluding the
assets of minor child) is greater.
If marriage does not subsist: In the net wealth of that parent who maintains the minor child in
the previous year,
and where any such assets are once included in the net
wealth of either parent, they will not be included inthe net wealth of other parent unless permitted by the
assessing officer.
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3. Assets transferred to a person or associationof persons [sec.4(1)(a)(iii)]
If any asset [within the meaning of Sec2(ea) ]has been transferred by an individual to a personor association of person, directly or indirectly,
without adequate consideration for the immediatebenefit of the :
Individual himself or herself
His/her spouse,
then such asset will be included in the netwealth of the transferor.
Again the relationship of husband and wife mustexist on the valuation date.
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4. Asset transferred under Revocable
Transfer[sec.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, directly or indirectly,
otherwise than under an IrrevocableTransfer,
then such asset will be included in the net wealth
of the transferor.
Contd.
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Contd.
Meaning of revocable transfer
Following transactions are treated as revocable:
1. Transfer revocable within a period of six years or
during the transferees lifetime; or
2. If the transferor derives any benefit, directly orindirectly, from the assets transferred; or
3. If the transferor has a right to re-transfer, directly or
indirectly, whole or any part of the assets or income
from the assets transferred.4. If the transferor has a right to re-assume power,
directly or indirectly, over the whole or any part of
the assets or income from the assets so transferred.
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5. An Asset transferred to sons wife
[sec.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, without adequate
consideration , then such asset shall be includedin the net wealth of transferor.
Imp.It is be noted that relationship between individual
(transferor) and daughter-in law must exist on both
the date- date of transfer and valuation date.
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6. Asset transferred to person or
association of person [sec.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, directly or indirectly, without adequate
consideration for the immediate, or deferred benefit of the
sons wife then such asset will be included in the net
wealth of the transferor.
It is be noted that relationship between individual
(transferor) and daughter-in law must exist on both the
date- date of transfer and valuation date
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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.
Example:
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7. Converted Property [Sec.4(1A)]
Where an individual, who is a member of a HinduUndivided Family, 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, or throwing it into the common stock of the family,or
By way of gift,
then such property is know as convertedproperty.
And the value of such converted property on thevaluation date shall be included in the net wealth of theindividual.
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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.
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Type B Deemed Assets
The following assets will be included in
the net wealth of any of assessee (i.e.
individual, HUF, or Company)
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1. Interest in a firm or Association of
Persons [Sec. 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 his/her interest in the assets of the
firm or association, determined in a manner laiddown in Schedule III.
If a minor is admitted to the benefits of the
partnership in a firm, the value of the interest of
such minor in the firm shall be included in the net
wealth of the parent of the minor.
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2. Gift made by means of book
entries [Sec.4 (5A)]
Where a gift of money from one person toanother person is made by means entries inthe books maintained by anyone or more of
the following:Donor
An individual or HUF or firm or an AOP orbody of individual with which the donor hasbusiness or other relationship,
Then the value of such gift shall beincluded in the net wealth of the donor.
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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 thesociety, company or other association, as the case
may be,
the assessee shall be deemed to be theowner of such building or part thereof.
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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.
The asset transferred need not be in the sameform in which it was transferred by the
transferor.
Any accretions to the asset transferred do notcome with in the scope of Section 4. [CWT v.
Saraswathi Achi (1980)]
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Assets exempt from tax [Sec 5]
The burden of proving that assets are
exempt from tax is upon the assessee.
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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
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Special rule 1Business Assets
When Business Assets are exemptWhere business is carried by trust wholly for
public religious purposes
Business consists of printing and publicationof books of a kind notified by Central Govt.
Business is carried on by institution wholly for
charitable purposes
Business is carried on by an institution, fund
or trust referred to in clause 23B or 23C of
Section 10 of Income Tax Act
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Special rule 2Business Assets
When Business Assets are taxable
Any other asset of business and charitable
purpose is not exempt
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Residential Building of Former
Ruler
Value of any building used for residence
by former ruler of a princely state is
exempt from tax.
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Former Rulers Jewellery
Jewellery in possession of former ruler of
princely state, not being his personal
property which has been recognized as
heirloom by Central Govt
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Assets belonging to Indian
Repatriates
Exemption is available if:
In case assessee is of Indian origin or citizen
of India.
Such person was ordinarily residing in foreign
country.
On leaving such country, such person has
returned India with intention of permanentlyresiding in India.
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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 AYs commencing from
period such person has returned to India
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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. metres in
area.
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Debt owed by the assessee
For calculating net wealth of an assessee debts owed bythe assessee shall be deductible subject to the followingcondition:
1. Debs should have been incurred in relation to taxable
assets.2. Such debt should be still outstanding on the valuation
date.
3. Debts located in India or outside India shall be
deductible on the basis of nationality and residentialstatus, as the case may be.
Liability under wealth tax Act is not a debt.
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Summary
For charging Wealth Tax the following points shouldbe kept in mind: Wealth tax is chargeable only in case of three categories of persons,
namely, individual, HUF, Company.
Wealth tax is charged @ 1% on the net wealth exceeding Rs. 30,00,000.
Net wealth of the assessee is to be computed as on the valuation date. For computing net wealth residential status and nationality of the
assessee will be considered.
Asset must be an asset within the meaning of Sec.2 (ea).
Such asset must belong to the assessee, however, deemed asset undersec. 4 will also be considered.
Such asset must be held by the assessee or the transferee under section 4on the valuation date.
For calculating net wealth exempt assets will not be considered.
For calculating net wealth debts owed by the assessee on the valuationdate will be considered.
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Thanks