Properties that come under the tax scanner
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With the increase in property prices beyond Rs. 50 lakh mark, provisions governing wealth tax and others are gaining importance.
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Tax net: Higher the property price, the more the chances of yours falling in the wealth tax bracket.
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 have a bearing on property transaction.
For example, verification of the Registrar’s guideline value of the land, valuation for cost of construction, wealth tax and capital gains tax are some. However, in recent times, with the property prices increasing and moving beyond the Rs. 50-lakh price band, provisions governing wealth tax and others have assumed more importance.
A recent report described how many flats are sold in Chennai for a price of more than a sum of Rs. 1 crore. This is not something to be surprised about. What may be surprising 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 (land within the jurisdiction of a municipality or a cantonment board having a population of not fewer than 10,000 or within 8 km of such limits).
Assets not included
Immovable properties that are not included in computing the wealth tax are urban land where construction of buildings are prohibited under any law and land held by the assessee as stock in trade (for instance, promoters buying land for selling after making layout or for development of flats and sale) for a specific period from the date of acquisition by him.
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 the purpose of 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 account for computing wealth tax.
For properties exceeding Rs.50 lakh in Chennai city and properties exceeding Rs.25 lakh 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 (not being advance payment towards rent for a period of three months or less ).
Unbuilt area
The value so arrived has to adjusted with respect to the unbuilt area of the plot. In Chennai, 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 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 per cent to 10 per cent the value is to be increased by 20 per cent. For difference of 10 per cent to 15 per cent, increase by 30 per cent and for the difference between 15 per cent and 20 per cent, the increase is by 40 per cent. If the difference is more than 20 per cent, the market value of the property shall be taken as the value.
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. 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.
C.H. GOPINATH RAO
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