Gift to a specified relative is not taxable

—Name withheld on request

We have assumed that your brother resides in the US and qualifies as a tax non-resident of India. The gift transaction will not have any income tax effect in the hands of you or your brother as he qualifies as a specified relative. We advise you to record any such gift in the legal document i.e. the gift deed and keep it aside. The responsibility to prove 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 documents to support the claim.

You may be required to separately verify the exchange control implications, if any, and the permissibility of such gift under the Foreign Exchange Management Act, 1999. Also, the US tax implications, if any, with respect to this transfer must also be verified.

I made my last deposit in the provident fund account of my employees in November 2015. I haven’t got my funds back. Every year I get interest as per prevailing rates. Currently, the interest earned is reported as tax-free in my income tax return, but I was told that when I redeem it, I will have to pay tax on the interest earned after the account is deactivated. Is this true and how much tax do I have to pay?

-Rakesh

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

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

However, any increase in such PF balance thereafter, i.e. from the date of closure of employment to the date of withdrawal, will be taxable in the hands of the employee. So, the interest earned will be taxable in your hands after the completion of your employment.

For taxable interest on employer contributions after the completion of your employment, it can be argued that it should be offered for tax on a year-to-date basis, not just on withdrawals. For taxable interest on employee contributions, tax may be offered, i.e. cash or merchandise, depending on the method of accounting adopted by the taxpayer. Disclosure in the tax return will need to be made accordingly. Further, on withdrawal of Provident Fund balance, interest proposed to be taxed on accrual basis will not be subject to tax in your hands.

Parizad Sirwalla is Partner and Head, Global Mobility Services, Tax, KPMG in India.