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Wealth tax implications on real estate

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.

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

  • a house meant exclusively for residential purposes, allotted by a company to a full time employee, having a gross annual salary of less than Rs 10 lacs (only cash component);
  • any house for residential or commercial purposes which forms part of stock-in-trade (thus unsold houses of real estate developers are not taxable);
  • any house occupied for the purposes of any business or profession being carried out therein (hence office premises are not taxable);
  • any residential property that has been let-out for a minimum of 300 days during the year (however commercial property is includible irrespective of letting out for any number of days);
  • any property in the nature of commercial establishments or complexes (hence a multi storied building with many offices inside shall not be taxable).

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

  • within 2 km from the local limits of a municipality or cantonment board having a population of more than 10,000 and upto 1,00,000; or
  • within 6 km from the local limits of a municipality or cantonment board having a population of more than 1,00,000 and upto 10,00,000; or
  • within 8 km from the local limits of a municipality or cantonment board having a population of more than 10,00,000.

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:

  • Land classified as agricultural land in the records of the government and used for agricultural purposes. Hence even if agricultural land is located within the distances specified above, it shall not be taxable.
  • Land on which construction of building is not permissible under any law.
  • Land occupied by any building which has been constructed with the approval of the appropriate authority, like the local municipal corporation.
  • Any unused land held for industrial purposes for 2 years from the date of acquisition. Land on which construction has begun but not completed on the valuation date (i.e. 31st March) shall not be taxable.
  • Any land held as stock in trade for 10 years from the date of acquisition

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.

Categories: Income Tax

View Comments (3)

  • It is pointed out that any commercial properties , which may include shops, offices, godown etc if not let out for 300 days it will be taxable.
    In my view the another clause says : any property in the nature of commercial establishment or complexes. Therefore, any shops, offices, godown etc are out side the wealth tax even if they are not let out.
    Pl clarify this position.

    Thanks

  • Can you please clarify which of the following are exempt under the clause commercial establishment or complexes:

    1)an office or a shop that are located within a building which is designed and used only for commercial activity

    2) an Office or a shop (designed for commercial activity) and is located in a building where there could be residential houses also

    3) A house (that is designed for residential purpose) but let out for commercial activity.

  • Are investments in Mutual Funds, Equities, NCDs, BONDs, Bank Deposits and deposits in firms and companies etc are to be included in Wealth Tax calculation?

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