What is Wealth Tax in India? Learn Key Provisions

Wealth tax was a tax in India imposed on individuals, Hindu Undivided Families (HUFs), and companies. It was charged 1% on net wealth exceeding Rs. 30 lakh. This tax aimed to “reduce wealth inequality”. However, in the 2015 budget, the government decided to abolish the wealth tax, as the costs involved in collecting it were higher than the benefits.

In place of the wealth tax, the government introduced a surcharge. Now, this surcharge ranges from 2% to 12%, depending on income levels. Individuals with annual incomes above Rs. 1 crore and companies earning Rs. 10 crore or more are subject to this surcharge. Hence, in this way, it targets the wealthiest citizens.

In this article, let’s understand the several key provisions of wealth tax and see how it was calculated. Also, we will consider some reasons why the wealth tax was abolished.

• Wealth tax was charged 1% on net wealth exceeding Rs. 30 lakh.
• It applied to individuals, HUFs, and companies.
• This tax was abolished in 2015 for simplification.
• Wealth tax was replaced with a surcharge, which led to higher revenue collection

The wealth tax aimed to tax the “net wealth” owned by an individual or entity, which included real estate, cars, and other valuable assets. In India, it applied to:

• Individuals
• Hindu Undivided Families (HUFs)
• Companies

It must be noted that partnership firms were not directly liable for a wealth tax. Instead, the assets of a partnership firm were taxed in the hands of the individual partners. This meant that first, the value of the firm’s assets would be calculated, and then, each partner’s share (known as “Interest in partnership firm”) would be added to their wealth for tax purposes.

Similarly, an association of persons (excluding cooperative housing societies) was also not liable for wealth tax. However, again, the assets of the association were taxed in the hands of its members.

Wealth tax was calculated on the net wealth of a person as of March 31 each year. The term “net wealth” represents all taxable assets minus any debts owed against them. It was charged 1% on net wealth exceeding Rs. 30 lakh.

For example,

• Say an individual had a net wealth of Rs. 40 lakhs.
• Now, they would pay 1% of Rs. 10 lakhs (the amount exceeding Rs. 30 lakhs), which would be Rs. 10,000 as wealth tax.

Certain entities in India were exempt from paying wealth tax. These included:

• Companies registered under Section 25 of the Companies Act (non-profit companies)
• Cooperative societies
• Social clubs
• Political parties
• Mutual Funds registered under Section 10(23D) of the Income Tax Act
• The Reserve Bank of India (RBI)

Additionally, wealth tax exemptions were also provided on certain assets, including:

• Investments in securities like shares or bonds
• Houses or plots smaller than 500 square metres
• Properties used for business or professional purposes
• Residential properties rented out for at least 300 days a year
• Vehicles used for hire
• Business assets held as stock-in-trade (inventory)

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As mentioned earlier, the wealth tax was abolished in 2015 by the Indian government. Primarily, this was done to simplify the tax system. The rules for wealth tax were complex and made it difficult for taxpayers to understand and comply. By removing this tax, the government aimed to make the tax regulations more transparent.
 

Apart from this, some other reasons for the abolishment of wealth tax are:

• Increasing revenue collection
  Wealth tax was replaced with a “surcharge”. This surcharge was easier to administer and expected to generate more revenue. Specifically, it targeted higher-income individuals and led to increased collections compared to the complicated wealth tax system.
  
  
• Complexity and administrative burden
  The wealth tax required taxpayers to calculate the value of their assets. This often involved hiring registered valuers, especially for assets like jewellery. This used to add complexity and made the process more costly and time-consuming.
  
  
• Lack of awareness
  Many taxpayers were unaware of the wealth tax or its filing requirements. As a result, a significant number of eligible individuals and companies failed to file their wealth tax returns, reducing its effectiveness as a source of revenue.