I am a non-resident Indian (NRI) since more than 20 years, having settled down in the UK with my family. Recently, upon the demise of my father, I received certain shares of listed companies under my share of inheritance. The UK inheritance tax goes as high as 40% and it does not apply if I continue to live beyond a period of seven years after gifting. Thus, I want to gift some of these shares to my son who also lives with me in the UK. Would there be any tax implications in India? Is such gifting of shares allowed under Indian law?
—Name withheld on request
Being your lineal descendant, your son qualifies as your ‘relative’. The transfer of shares would be exempt from capital gains in your hands and at the same time, it won’t be subject to tax as a gift in your son’s hands under the Indian income tax law. Since this transaction is not chargeable to tax in the hands of your son, there would be no TDS (tax deducted at source) obligation too.
Since you have received the shares under inheritance, the shares would be treated as being held by you on a non-repatriation basis under FEMA (Foreign Exchange Management Act). Between NRIs, there are two modes of gifting of shares available under FEMA – (a) gift made to the donee who will hold it on a repatriation basis and (b) gift made to the donee who will hold it on a non-repatriation basis.
If the gift is made to the donee who wants to hold the Indian shares on a repatriation basis (viz. the donee would be able to make full remittance of the sale proceeds post-tax outside India upon sale), then the donor is required to obtain prior approval of the Reserve Bank of India (RBI) apart from fulfilment of other conditions such as gift not exceeding 5% of paid-up capital of the respective Indian companies; fair value of such shares not exceeding $50,000 per financial year, etc.
Whereas if the gift were to be made to the donee who would hold it on a non-repatriation basis, such gift is permitted to be made without requiring any permission from RBI.
Under the non-repatriation route too, the donee will be able to remit sale proceeds (after tax) outside India upon sale upto $1 million per financial year.
Harshal Bhuta is partner at P.R. Bhuta & Co. Chartered Accountants.
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Published: 04 Feb 2024, 03:09 PM IST
