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Wealth tax: Higher slab, wider ambit

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The expensive piece of art you display in your living room may now add to your burden. The latest version of the (DTC) has increased the number of assets that will be considered as an individual’s wealth. It will now include a watch costing over Rs 50,000.

DTC has raised the threshold limit for wealth tax significantly, from Rs 30 lakh to Rs 1 crore. While the threshold has been increased, the tax rate continues to be the same (one per cent). So, anything in excess of Rs 1 crore will be taxed at one per cent. No education cess or surcharge will be added.

Broadening the ambit
Under DTC, the will be increased from Rs 50,000 to Rs 2 lakh. Moreover, definition of wealth will be broadened to include helicopters, archeological collections, drawings, paintings, sculptures and other works of art.

The tax code also aims to bring an individual’s foreign assets under the purview of wealth tax:

  • in banks abroad (Both foreign banks and Indian banks with branches located abroad)
  • Any interest in foreign private trusts
  • Any equity or preference share held in a ‘controlled foreign company’ — companies not engaged in active businesses and earning mostly passive income like dividends and royalties.

Continuing with old
Such assets as land, building, cars, yachts, boats, aircraft, jewellery, bullion and articles made of gold, silver or platinum will continue to be considered wealth even under DTC.

Also, you can continue to claim exemption for a property used for residential purpose, or a commercial property used for business purpose. Residential and commercial properties, owned and rented out for more than 300 days in the assessment year, can also be excluded.

The concept of “deemed assets” will continue. So, any transfer of assets or gifting to your spouse, minor children or even your daughter-in-law will lead to taxation.

Tax experts feel investing in bonds, debentures or mutual funds may be a more tax-efficient foreign investment option. Income from these instruments, like dividend or interest, will still be taxed. But capital invested will not be included in wealth or taxed.

Valuation
Wealth tax is calculated based on the value of assets. Assets like jewellery, land and building can be valued by government-approved valuers, typically civil engineers and jewellers. For motor cars, yachts, boats and aircraft, the insured declared value is considered.

However, DTC has not provided any guidelines for of new assets like art, sculptures or watches, which may pose a problem, says Homi Mistry, tax partner, Deloitte, Haskins and Sells.

He adds, “The valuation of these assets is very subjective. Unlike land, building and jewellery, no fixed parameters are available for valuation of art or watches, making it difficult to value these items and calculate the tax liability”.

Tax liability will be computed based on wealth owned as on March 31, unlike income tax that is calculated for the entire financial year. So, if you sell any of your assets during the year, the asset will be excluded from the total wealth while computing wealth tax.

Foreign focus

The Reserve Bank of India (RBI) allows individuals to invest up to $200,000 a year outside India. At present, only interest income from foreign deposits is added to your total income and taxed according to the applicable slab. However, under DTC, the deposit amount will also be included in your wealth. The interest earned will continue to be added to your total income and taxed accordingly.

Suresh Surana, founder, RSM Astute Consulting Group, feels the new inclusion will work against those who invest abroad. “Many Indians used the limit to invest abroad and have a more balanced portfolio. They will now be liable to pay tax,” Surana adds.

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