Tag: tax questions

How does grandfathering of capital gains apply in case of corporate actions

Personal Finance

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My question pertains to the applicability of grandfathering of capital gains in the case of corporate actions such as demergers and amalgamations. Let me illustrate with an example: I bought 100 shares of Company A in September 2016. In February of 2019, a scheme of demerger was approved by shareholders that entitled them to an equal number of shares in Company B (100 in this instant case; shares listed on the exchange in November 2019). I sell shares of both companies in October 2020. What should I reckon to be grandfathered price as on Jan 31, 2018, for both Company A and B to crystallise my capital gains liability? Please also confirm that the holding duration for both companies will be reckoned from the date of the original purchase, which is September 2016, and hence tax rate applicable in the case of Company B will also be LTCG.

Girish Balakrishnan

The following comments are based on assumption that the shares of company A are equity shares & listed in a recognised stock exchange in India.

As per the provisions of Section 112A of the Act, Long term capital gain (LTCG) on sale of STT paid equity shares exceeding ₹1 lakh shall be taxable at the rate of 10 per cent. Further, surcharge (if any) and health & education cess at 4 per cent shall apply. For the purpose of computing LTCG/LTCL, in cases where the asset is acquired before the 1st day of February, 2018, the cost of acquisition, shall be the higher of the following, as defined in Section 55(2)(ac) of the Act:

· actual cost of acquisition; or

· lower of (i) fair market value (FMV) of such share on 31 January 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.

The term FMV, in the context of equity shares, has been defined in section 55(2)(ac) of the Act, as follows:

· In case the equity share is listed on any recognized stock exchange, the highest price quoted on such stock exchange as on January 31, 2018;

· Where the equity share, is not listed as on January 31, 2018 but is subsequently listed on the date of the transfer, an amount which bears to the cost of acquisition the same proportion as the CII for the financial year 2017-18 bears to the CII in which the asset was held by the tax payer or for the financial year 2001-02, whichever is later.

On a literal interpretation of the wordings in section 55(2)(ac) of the Act, one may find it difficult to contend that the equity shares in B Ltd have been acquired prior to February 1, 2018. Hence, technically, the grandfathering benefits may not be available in case of the equity shares in B Ltd.

Given the above, one could argue that the FMV of the equity shares in A Ltd as on January 31, 2018 should be adopted for determining the proportionate FMV of the shares in A Ltd and B Ltd. However, adopting the grandfathering benefits for shares in B Ltd is not free from litigation.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

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Tax Query: How much money can father send to son working abroad?

Personal Finance

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I am working with The Ramco Cements Limited. I am also an employee of a firm and I pay/ file my annual tax returns. My son is working in the US. How much amount can I send to him every year out of my annual savings? How does it affect him in terms of tax returns there?

Ravi Shankar

As per the provisions of Foreign Exchange Management Act, 1999 (‘FEMA’), under the Liberalised Remittance Scheme (LRS), all resident individuals are allowed to freely remit up to USD 250,000 per financial year (April-March) for permissible transactions under LRS.

Remittances outside India in the nature of gifts or for maintenance of close relatives abroad are permitted transactions under the LRS.

Hence, you may remit up to USD 250,000 under LRS for such purpose to your son who is living outside India. As per provisions of section 56 (2)(x) of the Income-tax Act, 1961 (‘the Act’) income tax is payable on any sum of money (if aggregate value exceeds ₹50,000) received by an individual without consideration.

However, any receipts from specified relatives (includes lineal ascendant or descendant of the individual) or on specified occasions such as marriage and inheritance would not be considered as taxable. Hence, a gift of money to your son will not be subject to tax in the hands of your son in India.

In relation to your US tax query, I am not a subject matter expert of US tax laws and therefore would not comment on the same.

Axis Direct has a reporting system for dividends paid. In that, dividend amounts are shown in March 2021 based on declaration date whereas the actual credit is made to savings bank account in April 2021. Please clarify for income tax purpose what should be considered. Is the dividend amount to be shown in the financial year of month in which declared or in the financial year based on the credit in bank account? Also, which is the document considered by the Income Tax department?

S R Subramani

As per the provisions of section 8 of the of the Income-tax Act, 1961 (‘the Act’) along with related clarifications provided by Income-tax Department (via tutorial uploaded in Income-tax website), final dividend, which is chargeable under the head Income from Other Sources, should be considered as taxable in the year in which it is declared, distributed or paid, whichever is earlier.

In the instant case, I understand that the subject dividend was declared in March 2021 (i.e. FY 2020-21) and was subsequently paid in April 2021 (i.e. FY 2021-22). As such, the dividend would be required to be offered to tax in the year in which it is declared i.e. FY 2020-21.

Further, it may be noted that at the time of filing of your income tax return, you are not required to submit any proofs / documents. However, the same should be kept on records for the purpose of assessment / revenue audit, if any. In that case, the dividend report can be submitted with the authorities.

The writer is a practising chartered accountant

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