Gifts from NRNR deposits

T. Banusekar

IN THE current year I would be a resident and ordinarily resident in accordance with the Income-Tax Act. I would like to know the following:

When the balance in NRNR deposits, which stand in my name, are gifted on maturity is there any tax payable?

Should these gifts be made by cheque? Is there any separate deed to be made?

Can gifts be made to my daughter at the time of marriage or later? If so what are the tax implications?

On sale of shares I am likely to earn a gain. I have reinvested the entire proceeds in other shares. Is tax still payable?

Can the loss on sale of some of the shares be set off against gain from other shares? If the gain is insufficient for the set-off, can it be carried forward to subsequent years?

If the loss is a speculation loss, what will be the tax treatment?

Deepak. R

Thrissur

Reply

Section 3 of the Gift Tax Act being amended to provide that gifts made on or after October 1, 1998 are not chargeable to tax. Therefore, no gift tax is leviable either on the donor or the donee at the time of making any gift. This will be the state irrespective of whether the gift is made to the daughter before or after marriage.

A gift can be made either in cash or by cheque and no embargo is placed on the same. No separate deed is required for a gift to be made of a movable property. However, as a matter of abundant caution it would be advisable for a donor to give a letter to the effect that he is making a gift of the movable property and for the donee to accept the same.

Capital gains will have to be paid on the gain arising from the sale of shares. The fact that the entire consideration has been reinvested in other shares will not grant any exemption from capital gains. However, the loss arising from the sale of certain shares may be set off from gain arising from others and tax paid on the balance only.

If, after the set-off of such losses under the head `capital gains' against income under the same head, there still remains a balance of loss, the same may be carried forward to subsequent years and set off against the income under the head `capital gains'. This set-off and carry-forward of loss must be done within a period of eight assessment years immediately succeeding the assessment year in which the loss was first computed. It may be noted that for the purpose of set-off, and carried-forward and set-off, no distinction is made between a short-term capital gain and a long-term capital gain.

In the case of an individual who is buying shares as an investment, the question of speculation loss does not arise. The tax treatment, therefore, will be similar to what was explained earlier for capital gains. However, if the individual purchases and sells shares as a trader in shares, the same may be treated as speculation if it falls within the scope of section 43(5), which defines the term `speculative transaction'.

In such a case, the speculative loss cannot be set off against any other income except against speculative gain. The balance after such set-off may, however, be carried forward and set-off against speculation income within a period of eight assessment years immediately succeeding the assessment year in which the loss was first computed.

Query

Kindly clarify the following:

ACan a private limited software company issue shares to its employees by way of employees stock option?

AIf the answer to (a) above is in the affirmative, how is the value of shares to be determined?

AWhat is the basis for valuation of shares when shares are issued by a public limited company to it's employees under an employees stock option plan (ESOP)

P. S. Hariharan

Reply

A private limited company is not prohibited from allotting to its employees shares under an ESOP. Normally, under an ESOP, shares are issued to employees at values much lower than their real worth. This is meant to induce an employee to stay with the company for longer periods and also to enthuse him to work better for the organisation, given that in such a case, he would also be one of the owners of the company.

There will, however, be a difficulty when it comes to the valuation of such shares, though this difficulty, under the amended provisions of the Income-Tax Act, becomes academic. Under the Income-Tax Act, before the amendment the taxability of shares allotted under an ESOP used to be as given in Table 1. With the amendment to the Act, the taxability will be as shown in Table 2.

Thus, one would notice that the determination of market value might not be very material from the tax point of view. As regards the allotment price, it is normal for the employer to devise a scheme and the price may be fixed based on the considerations stated above, which will be attractive to the employer and to the employee. This rule will apply irrespective of whether the company is a private limited or a public limited company.

(The author is a Chennai-based practising chartered accountant.

Business Line invites queries on personal taxation issues to this column. They will be answered in the first Sunday's issue of Business Line every month. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600 002, or by e-mail to vaidy@thehindu.co.in