Mukesh Patel.in
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WEALTH-TAX SHELTER FOR RESIDENTIAL HOUSE!

One house or an open plot of land of upto 500 sq.mtr. is treated fully exempt from Wealth-tax irrespective of its value!

Under the present scheme for levy of Wealth-tax, all ‘productive assets’ are excluded from the definition of the term ‘assets liable to Wealth-tax.’ Accordingly, in respect of house property, the following have been treated as assets liable to Wealth-tax:

  • Any building or land appurtenant thereto, whether used for residential or commercial purpose or for the purpose of maintaining a guest house.
  • A Farm House situated within 25 kms. from the local municipal limits.

 HOUSE PROPERTIES EXEMPT FROM WEALTH-TAX

     However, the following kinds of house properties have been specifically excluded from the definition of ‘assets liable to Wealth-tax’ and accordingly the same would not be taxable:

       A house maintained exclusively for residential purposes which is allotted by the company to an employee or officer or director who is in full time employment, having a gross annual salary of less than Rs.5,00,000.

  • Any house which forms part of stock in trade.
  • Any house which the taxpayer may keep for the purposes of any business or profession carried on by him.
  • Any residential property that has been let out for a minimum period of 300 days in the financial year.
  • Any property in the nature of commercial establishments or complexes.

     Under Section 5(vi) of the Wealth-tax Act, it is further provided that one house or part of a house, or a plot of land comprising of an area of 500 sq.mtr. or less, belonging to an individual or HUF shall be treated as exempt from Wealth-tax.

 CONCESSIONAL VALUATION OF ONE RESIDENCE

     The Wealth-tax Act provides for the benefit of special concessional valuation as under in respect of a self-occupied residential house owned by the taxpayer:

  • Rule 3 of Schedule-III of the Wealth-tax Act prescribes the rent capitalization method for valuation of a house property liable to wealth-tax. The rent capitalization value is worked out at 12.5 times of the ‘net maintainable rent’ (NMR). The NMR is determined after deducting from the ‘gross maintainable rent’ (GMR), the property taxes and a standard deduction equal to 15% of GMR. The GMR represents the annual rent for the property as assessed by the local authority for property tax purposes. The rent capitalization value generally works out much lower than the actual cost of the property.
  • Where the property is acquired or constructed prior to 31st March, 1974, the rent capitalization value (under Rule 3 of Schedule III of the Wealth-tax Act), on the relevant valuation date can be taken as the value of the property, even if it is less than the cost of acquisition/construction (actual cost) of the said property.
  • Where the property is acquired or constructed after 31st March, 1974, the value of such house cannot be taken at less than its actual cost. However, as per a special concession under Rule 3, the rent capitalization value on the relevant valuation date can be taken as the value of the property, even if it is less than its actual cost, subject to the condition that the cost of acquisition/construction of such house does not exceed: 
  • Rs.50,00,000, if the house is situated at Mumbai, Chennai, Kolkatta or Delhi, and
  • Rs.25,00,000, if the house is situated at any other place.

            If however, the cost of such house exceeds Rs.50,00,000 or Rs.25,00,000, as the case may be, then the actual cost or the rent capitalization value, whichever is higher, shall be taken as the value of the house.

 SMART TIPS FOR WEALTH-TAX PLANNING

       Here are some smart tips you need to keep in mind, if you want to ensure that you do not get into the wealth-tax trap on residential house and attract an annual liability of 1% on its taxable value:

  • No worries if you own only one residential house since it would be fully exempt (whatever be its cost).
  • Try to invest your second house in the case of your wife or HUF.
  • If at all you need to invest in the second house in your own case, if possible, ensure that its cost in your hands is less than Rs.25,00,000 (Rs. 50,00,000 if the house is in Mumbai, Chennai, Kolkatta or Delhi), so that you can opt for the rent capitalization value in preference to the actual cost.
  • And finally, you need not worry about wealth-tax if you plan to let out your second house.

 

       

 

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