Wealth tax is levied on the value as determined under the wealth tax rules (by capitalizing of annual rent/value). Computation mechanism for valuation of property for wealth tax purposes has been outlined here:

STEP 1 – GROSS MAINTANABLE  RENT (GMR)
If property is letout
Annual rent or annual value (as per local authority), whichever is higher
If property is not letout
  • Property is situated within jurisdiction of a local authority
Annual value (as per local authority)
  •      Property is situated outside jurisdiction of a local authority
Annual reasonably expected as annual rent
STEP 2 – NET MAINTAINABLE RENT (NMR)
GMR
Less: a) Taxes levied by local authority (on accrual basis)

                   b)      15% of GMR
STEP 3 – CAPITALIZATION OF NMR

Property situated on

  •  Freehold land
  • Leasehold land (unexpired period of lease is 50 years or more)
  • Leasehold land (unexpired period of lease is less than 50 years)



NMR multiplied by 12.5

NMR multiplied by 10


NMR multiplied by 8
STEP 4 – PROPERTY VALUE FOR WEALTH TAX PURPOSES
Property acquired/constructed after 31 March 1974
Property acquired/constructed on or prior to 31 March 1974


Capitalized NMR or actual cost (including cost of improvement), whichever is higher
Capitalized NMR


NOTES TO ADJACENT TABLE:

  • Annual rent is computed by adding the following to actual rent: a) local authority taxes paid by tenant; b) 1/9th of actual rent (in case of repairs are borne by the tenant); c) 15% per annum on the amount of deposit granted by the tenant to the owner; d) lease premium for the year; e) any other benefit derived by the owner; f) any obligation of the owner met by the tenant.

  • Adjustments have to be made for unbuilt area of land under prescribed circumstances.

  • For one house used wholly for residential purposes and cost thereof up to Rs. 50 lakhs (in Delhi, Kolkata, Mumbai and Chennai) or Rs. 25 lakhs (in other cities), the value is capitalized NMR (ie step 3 value) and step 4 will not apply.




HOW IS WEALTH TAX COMPUTED?

Wealth tax is levied at 1 percent of net wealth (comprising of all chargeable assets) above Rs. 30 lakhs in respect of assets as on 31 March of the relevant financial year. Net wealth is arrived at by reducing debt incurred by the taxpayer in relation to such asset. In case the taxpayer has obtained a loan and the same has been utilized for purchase of the second house, then such loan amount is to be deducted while arriving at the net wealth. The computation of wealth tax liability has been outlined below by way of an illustration:


PARTICULARS
AMOUNT (IN RS)
Value of house (as per wealth tax rules)
9500000
Less Debt incurred in respect of above house
1500000

8000000
Add Other assets (subject to wealth tax such as jewellery)
500000
Net weatlh
8500000
Less:
3000000
Taxable wealth
5500000
Wealth tax at 1% of Rs 55,00,000
55000


Given that real estate transactions are of high value, it is always advisable for taxpayers to seek professional assistance from tax and legal experts.