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Money received as gift from specified relatives is exempt from income tax

LiveMint logoLiveMint 06-03-2017 arizad Sirwalla

I had continuous employment for 4-and-a-half years. Now I am going abroad for work. I am not sure whether to keep my provident fund (PF) balance or withdraw the total amount. I understand that I will continue to earn interest for 36 months, but after that the account may become dormant. What will be the taxability if I withdraw now or later?

—Shahid Nambiar

The PF balance could be withdrawn on cessation of employment and the application for withdrawal should be submitted after 2 months have elapsed.

The cumulative PF balance withdrawn from a recognized PF triggers tax liability, if an employee does not render continuous services for a period of at least 5 years. While determining this period, the time for which service was rendered to any previous employer(s) should also be added if the cumulative PF balance maintained with the old employer has been transferred to the PF account of the new or current employer.

We assume that this was your first job. As the cumulative period of service is less than 5 years (only 4-and-a-half years), withdrawal of accumulated PF balance will be taxable in the financial year (FY) of withdrawal. This will be the case even if you withdraw from this PF account (without transferring to your new employer, if any) at a later date.

The aggregate of the employer’s contribution to PF and interest earned thereon is taxable as salary. Further, the deduction claimed by you (under section 80C of the Income-tax Act) on your own contribution to the recognized PF shall also be taxed as salary. The interest earned on your contribution shall be taxed as ‘Income from other sources’.

The tax rate would depend upon your applicable income tax slab in each of the FYs during which the PF contributions were made. Surcharge (as applicable) and education cess shall be applicable for each year. You can avail relief under section 89.

However, if you transfer the accumulated PF balance maintained with the current employer to the PF account maintained with new employer(s) (in case of future employments) and later on withdraw the accumulated PF balance maintained with the new employer(s) as per the PF provisions, as mentioned earlier, while computing the period of continuous service with the current employer, the period of service rendered with the previous employer would be included. Where the cumulative years of service with the previous and new employer(s) are more than 5 years, PF withdrawal will not trigger any tax liability.

Further, as per recent amendment in the PF law, an account would continue to earn interest on accumulated balance even after 36 months.

My yearly taxable income is around Rs10 lakh. My father in-law has a residential land currently worth Rs1 crore. He had bought the land more than 3 years ago. He plans to sell it, keep 15% of the yield with himself and transfer the remaining amount to me in my bank account (out of love and affection for me). Will there be any tax implication for me?

—Dhruv Grover

As land has been held for more than 3 years, your father-in-law will need to compute the long-term capital gains (LTCG) on the sale and pay appropriate LTCG tax.

Any cash exceeding Rs50,000 received by an individual during the relevant FY without or for inadequate consideration, is taxed under ‘Income from other sources’ in the hands of the recipient. An exemption is available if the amount is received from a relative, which includes an individual’s parents-in-law. There should not be any tax implications in your hands on receipt of this. Your father-in-law shall also not be taxed on the above gift transaction.

It would be advisable to have documentation in place to substantiate the genuineness of the gift transaction.

Any subsequent income from investing this amount shall be taxable in your hands depending upon the nature of income.

Parizad Sirwalla is partner (tax), KPMG

Queries and views at mintmoney@livemint.com

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