Properties that come under IT scanner
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What the assessee may have overlooked is that property worth more than Rs.50 Lakh could attract wealth tax , writes C.H.Gopinath Rao
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Property purchase: Every property owner is closer to the wealth tax net at present.
Most of us are aware of the Income Tax rules and when we purchase an immovable property, we take care to reflect the source of income in our returns. The receipts of purchases and payments are produced for scrutiny if called for. In addition to this there are aspects of other direct taxes that could have a bearing on our property transaction.
For example, verification of the Registrar’s guideline value of the land, valuation for cost of construction, wealth tax and the Capital gains tax are some . However, in recent times, with the property prices increasing and moving beyond Rs.50 lakh price band provisions like wealth tax have assumed more importance.
A recent report described that many flats are sold in Chennai for a price of more than Rs. one crore. This is not something to be surprised about. What may be surprising to know is that there are hardly any flats which are priced below Rs. 50 lakh. The buyers may ascertain the legalities of such purchases and check the title . What they may have overlooked is that any property worth more than Rs.50 lakh immediately attracts wealth tax.
Wealth tax is levied on the net wealth of an assessee on valuation date for each assessment year. The charge levied is one per cent of the amount by which the net wealth of the assessee exceeds Rs.15 lakh. The assessee includes individual, Hindu undivided family and company.
The scope of assets include some of the immovable properties such as any guest house, a residential house unless it is used exclusively for residence of a company employee or officer of a full time employee director and allotted to him by the company under some conditions, a farm house if located within 25 km of the local limits of a municipality and urban land i.e land within the jurisdiction of a municipality within 8 km of such limits.
Assets not included
Assets of immovable properties that are not included in computing the wealth tax are urban land where constructions of buildings are prohibited under any law and land held by the assessee as stock in trade (like promoters buying land for selling after making layout or for development of fats and sale) for a specific period from the date of acquisition. In addition, any unused land for industrial purposes for a specified period from the date of acquisition, any residential property let out for at least 300 days in a previous year, any house occupied by the assessee for his business or profession and one house or part of a house or a plot of land belonging to an individual provided the plot of land comprises an area up to 500 sq.m are not taken into computing wealth tax.
For properties exceeding Rs.50 lakhs in Chennai city and properties exceeding Rs.25 lakhs in the mofussil area , the market value is taken for computing the wealth tax. For properties less than Rs.50 lakh and Rs.25 lakh, the following procedure is adopted.
Value of the property is the net income per annum multiplied by 12.5 (where 12.5 is the factor arrived at by dividing 100 by the rate of interest, in this case 8 per cent).
The net income in turn is calculated as gross income minus the outgoings. Gross income is the annual rent received if the property is let out and in other cases, the annual rent assessed by the local authority is taken.
The actual rent shall be increased in cases where the taxes levied by the statutory authorities is borne by the tenant or the owner has accepted any amount as deposit (advance payment towards rent for a period of three months or less is not considered).
Unbuilt area
The value so arrived has to adjust with respect to the unbuilt area of the plot. In Chennai, the CMDA specifies that the building can occupy about 65 per cent of the plot area. This is in excess of the specified area provided by Rule 3. For Chennai it is 60%. In such cases, the maximum area specified by the Rule 3 is considered. If a particular building satisfies this condition and in addition there are still open spaces left then following corrections are made to the value. If the difference between unbuilt area and the specified area exceeds by 5% to 10% the value is to be increased by 20%. For difference of 10% to 15, increase by 30% and for the difference between 15% to 20% increase is by 40% . If the difference is more than 20% the market value of the property shall be taken as the value.
A property with an extent of 4600 sq.ft land and 2000 sq.ft of building in G.F. at Kodambakkam was acquired by the assessee for Rs. 30 lakhs in the year 1994. Today the market value is Rs.80 lakhs.
Valuation of the property for the purpose of W.T as on 31-3-2008
Extent of land = 4600 sft
Extent of building in G.F. = 2000 sft
Extent of unbuilt area = 4600 sft – 2000 sft =2600 sft
Percentage of unbuilt area - 2600 sft/ 4600 sft = 56.52 %
Specified area for Chennai is 60%.
As the percentage of unbuilt area is less than specified area and the cost of acquisition is less than Rs. 50 lakhs, the value for the purpose of Wealth tax can be arrived by the application of Rule 3 without any adjustment.
The property is self-occupied and the annual value fixed by corporation is Rs. 20,966
Gross annual income as per corporation will be (Rs. 20,966 / 10.92) Rs. 19,200
Property tax is Rs. 4762 and Water tax Rs. 1428
Then the total tax per annum will be Rs. 6190
Net income will be annual rental income minus taxes and 15% of gross maintainable rent
This will be ( Rs. 19200- Rs. 6190- Rs 2880) Rs. 10,130.
Value for purpose of Wealth tax = Rs. 10130 x 12.5= Rs. 1,26,625
For computing the wealth tax, the value of the property is taken as Rs. 1,26,625 and not the market value of Rs. 80 lakhs.
If the above mentioned property is now purchased as the second property by an assessee then the value will be added with the other assets and wealth tax of 1% per year of the total value is to be paid.
The filing of wealth tax return is the responsibility of the assessee. With every property purchase the wealth tax component changes and any upward revision of the property value affects the tax. Given the high value of properties in Chennai every property owner of a moderate size apartment would be closer to a wealth tax net. It is advisable to consult an auditor before purchase of any immovable property in order to understand the present as well as the future tax implications.
The author is former National President, Institution of Valuers.
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