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I was awarded employee stock by an international company that I had left four-and-a-half years ago. The stock is being held in a fidelity account in the US. My brother is a US citizen and I want to gift this stock to him instead of selling it. Please advise how I can do this? Also, what will be my tax liability in this transaction?

—Name withheld on request

 

We have assumed that your brother is based in the US and qualifies as a tax non-resident of India. The transaction of gift will not lead to any income tax implications in your hands or your brother’s as he qualifies as a specified relative. We advise you to record any such gift in a legal document, namely a gift deed and save it aside. The onus of proving that the transfer of such shares between you and your brother is a gift or an irrevocable transfer will be on you and your brother, so there should be documentation to support the claim.

You may need to separately verify the exchange control implications, if any, and permissibility of such gift under the Foreign Exchange Management Act, 1999. Also, the US tax implication, if any, in relation to this transfer should also be verified.

 

I made my last deposit in my employees’ provident fund account in November 2015. I have not withdrawn my corpus. Every year I get interest as per the prevailing rates. Currently, the interest accrued is reported as tax-free in my income tax return, but I was told that when I cash it out, I will need to pay tax on the interest I earned after the account became dormant. Is this true and how much tax will I have to pay?

—Rakesh

 

It is assumed that you have rendered continuous service for a period of five years or more, up to November 2015.

As per tax rules, the accumulated PF balance due and payable to the employee, i.e. balance to his credit on the date of cessation of his employment, is exempt from tax, if he has rendered continuous service for five years or more. If the period of employment is more than five years, the accumulated balance to the extent payable to the employee, at the time of ceasing employment, shall be fully exempt from tax.

However, any accretion to such PF balance thereafter, i.e. from the date of ceasing employment till the date of withdrawal, will be taxable in the employee’s hands. So, the interest earned post completion of your employment will be taxable in your hands.

For the taxable interest on employer contribution post completion of your employment, it may be contended that the same should be offered to tax on a year-on-year basis and not just on withdrawal. For the taxable interest on employee contribution, the same may be offered to tax based on the method of accounting adopted by the taxpayer, i.e. cash or mercantile. The disclosures in the tax returns would need to be made accordingly. Further, upon withdrawal of provident fund balance, interest offered to tax on accrual basis would not be subject to tax in your hands.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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