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Shares bought without STT could attract 20% tax on sale

LiveMint logoLiveMint 19-06-2017 Parizad Sirwalla

Some weeks ago, I inherited shares from my father who had bought them more than 2 years ago from BSE/NSE. I would like to sell them. Will I incur tax, given that these have been held by my father for more than a year? In case there is a tax, should I hold it for another year?

—Niranjan Gokhale

On sale of the shares (listed on recognized stock exchange in India) you would be exempt from tax under Section 10(38) of the Income Tax Act, 1961 (the Act) if the shares are classified as long-term capital asset (LTCA). They can be treated as LTCA if held for more than 12 months prior to sale. Further, as you have acquired these shares as inheritance from your father, the period of holding for you would also include the period for which your father held the shares. Hence, as you have held the shares for more than 12 months cumulatively (including the period of holding of your father) the same would qualify as LTCA.

Consequently, the gain arising on the sale of such shares by you should be exempt if Securities Transaction Tax (STT) was paid by your father at the time he purchased the shares that were gifted to you. If your father did not pay STT at the time of purchase, tax at the rate of 20% (excluding surcharge and education cess) would be payable on the long term capital gain after benefit of indexation of cost.

It is interesting to note that these shares were acquired by you (by way of a gift) after 1 October 2004, without payment of Securities Transaction Tax (STT). Accordingly, as per literal interpretation of the recent amendments to Section 10(38) of the Act, the gain arising on the sale of shares by you, would not qualify for an exemption.

However, the Central Board of Direct Taxes (CBDT) issued a press release on 3 April 2017 to invite public comments on the draft notification, which allows exemptions under Section 10(38) to all transactions, except the specific transactions, where the shares were acquired post 1 October 2004 without payment of STT.

In other words, this draft notification lists certain specified transactions—which would be covered by the new amendment (that is, no exemption allowed). A transaction of gift, on the premise that the same cannot be termed as purchase, is not mentioned in this list of specified transactions.

Hence, prima facie, a view can be adopted that the sale of listed equity shares gifted to you by your father (who acquired the same 2 or 3 years ago) would qualify for long-term gain exemption under Section 10(38). However, only once the CBDT issues the final notifications, can a final view can be adopted on this topic.

In any case, you would need to make suitable disclosure of this transaction in your income tax return.

My 2-year-old daughter has done a few modelling assignments and the total payment from these is about Rs7 lakh. It was deposited in my account. What are the tax implications?

—Karan Goyal

Generally, any income arising to a minor child is clubbed in the hands of parent having higher income. However, income arising from the application of a child’s skill, talent or specialized knowledge and experience, is taxed as income in the hands of the minor child and not clubbed in the hands of the parent. Hence, the modelling fee received by your daughter should be treated as income taxable in her hands. You would need to apply for a Permanent Account Number for your daughter and pay taxes on the net modelling fees earned by her (after deducting eligible expenses incurred by you for the purpose of earning this fee). Please note that appropriate documentation and books of accounts would also need to be maintained for supporting the income and expense claims. The taxes on the income (net of any tax deducted at source) would need to be paid as advance tax within the financial year in 4 quarterly instalments. You will also need to file her tax return in the capacity of her guardian. You should also obtain an Aadhaar number for your daughter, since a PAN that is not linked to the taxpayer’s Aadhaar would be deactivated from a date to be notified . In case the modelling fee was earned during FY2016-17, you would need to file your daughter’s tax return for that year on or before 31 July 2017, after payment of appropriate taxes.

My TDS amount varies every month in my salary slip. Why is it so? Should the company deduct TDS directly even if I individually file returns? How does it exactly work?

—Nasir Iqbal

Every person responsible to pay salary, which is liable to tax in India, is responsible to deduct TDS every month from the salaries paid to the employees, as per the applicable tax rates. This responsibility is independent of your personal responsibility to pay taxes on your total income and file your tax return. The estimated tax is computed by the employer using the average rate of income tax applicable to each employee in the financial year concerned, based on the estimate of salary income for the financial year. The TDS in each month could vary if the salary paid varies in each month. However, this is best verified by you seeking further clarity from your employer.

Parizad Sirwalla is partner (tax), KPMG.

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