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Understanding Wealth Tax and its applicability


What is Wealth Tax?

 Wealth tax is a relatively lesser known direct tax which is levied if the total value of “unproductive assets” of an individual exceeds Rs 30 Lakhs in a financial year. The percentage of tax is 1 % of the value of the assets exceeding Rs 30 Lakhs. For eg. – If the assets covered under this tax are worth  Rs 50 Lakhs, wealth tax payable is  Rs. 20,000 – 1 % of ( 50 Lakhs-30 Lakhs).

A surprising fact

Though wealth tax is an important part of the direct taxes family, owing to lack of awareness and non-payment, it forms less than 1 % of the total direct tax collections annually!

What are “productive” and “unproductive” assets?

Unproductive assets are assets (listed below) where the money invested/blocked cannot be used by the government for the benefit of the economy; hence they attract wealth tax.

  •  More than one property which is not let out.
  • Physical gold and ornaments made of gold.
  • Art, paintings and artifacts.
  • Luxury yachts, aircrafts and watches.
  • Cash above Rs 50,000/-.

The following assets are termed as “productive” for the economy and are exempt from wealth tax.

  •  Fixed deposits – The bank where the deposit is kept lends the money to those who need it and hence boost economic activity in the country.
  • Stock/shares – The money which the investor pays to buy shares of the company is used by the company for projects which boost production, employment and national income.
  • Mutual fund investments- These invest in securities issued by companies and the funds raised assist in economic growth.

Why is it levied?

 A large section of the population still believes in holding a majority of their wealth in physical assets – mainly real estate and gold as they draw psychological comfort from the fact that the asset is in their possession. But the investors’ money blocked in such assets does not benefit the economy in any way.

The idea behind levying this tax by the government is to encourage people to hold more of financial assets which can be utilized for economic development.

What is the penalty for late payment/non-payment?

 It is mandatory for every individual to declare and pay the wealth tax on time. Late payment attracts 1% of the amount for every month of delay. Evading wealth tax attracts a fine of 100 % to 500 % of the tax amount. Cases where the amount of wealth tax  evaded is very high can also lead to imprisonment.

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