CA Deepak Nagori
With increasing disposable incomes in the country, it is common for people to acquire more than one house or invest in plots of land for long term investment purposes. Investment in a flat in a residential building/complex or in an independent house not only provides regular stream of rental income, but also provides capital appreciation over time which acts as a hedge against inflation. Investment in land plots can also yield attractive returns if after the investment, significant developments happen in the nearby areas. Moreover, there are tax benefits under the Income Tax Act which provide for total exemption from Capital Gains tax on sale of property if certain conditions are satisfied. However, not all are aware that there is a wealth tax incidence too on property, which is levied on net wealth of a person under the Wealth Tax Act, 1957. Wealth Tax is applicable only for an individual, HUF (Hindu Undivided Family) and a company. Briefly, we shall discuss the charge of wealth tax on property and also ways to minimise or avoid this tax.
Wealth tax is leviable if you are the owner of a house, whether used for residential or commercial purposes, including a guest house. For this purpose, house also includes a farm house situated within 25 km from local limits of any municipality or a cantonment board, but does not include
Wealth tax is also leviable on urban land. For this purpose, urban land means land situated in any area under the jurisdiction of a municipality or cantonment board, having population of at least 10,000 or
Thus we can say that land outside the above limits will be considered as rural land and will not be included in net wealth.
Also, urban land does not include the following:
Even though land or building as above may be a taxable asset, but an exemption from wealth tax has been provided to an individual or an HUF in respect of one house (or part of house) or a plot of land upto 500 square metres in area. The house may be self-occupied or let out or used for residential or commercial purposes. A company is not eligible for this exemption. Hence, if you are the owner of multiple houses or land plots taxable under wealth tax, you can take exemption for the highest valued house or plot.
Wealth tax is levied on the net wealth on the valuation date (i.e. 31st March every year) @ 1% of the net wealth in excess of Rs. 30,00,000. Net wealth is calculated considering real estate as discussed above and also jewellery, motor cars, yachts, aircrafts and cash in hand. Value of house for wealth tax purposes is calculated every year by capitalizing the rental income or annual municipal valuation of the house, as per details given in the Wealth Tax Act. Valuation of land and other assets is taken as their market value as on 31st March of the year.
Wealth Tax is envisaged as a tax on idle assets and this point is clear from the aforesaid discussion. Thus the levy of wealth tax on real estate encourages people to put the real estate to productive use.