For Non-Resident Indians (NRIs) managing financial assets in their home country, navigating tax regulations is crucial. A common query involves the transfer of assets like shares to family members. In a recent expert clarification, a chartered accountant has detailed the tax implications for an NRI wishing to gift shares of an unlisted Indian company to his resident father.
Gifting Shares to Relatives: A Tax-Exempt Transfer
The scenario involved an NRI living in Dubai for six years. He had purchased shares of an unlisted Indian company using funds from his Non-Resident Ordinary (NRO) account. Now, he wishes to gift these shares to his father, who resides in India. The primary concern was whether this transfer would attract any tax liability in India.
According to Harshal Bhuta, partner at P. R. Bhuta & Co. Chartered Accountants, this specific transfer is completely tax-exempt under current Indian income tax law. The key reason is that a transfer of property between specified relatives, which includes father and son, is considered an exempt transfer. Consequently, the sender does not trigger any capital gains tax liability by making the gift.
Furthermore, this type of transfer falls outside anti-abuse provisions related to receiving property below its fair market value. This means the receiver, the father in this case, also faces no tax implications upon receiving the gifted shares, regardless of their monetary value.
Future Tax Implications Upon Sale
While the act of gifting is tax-free, tax implications do arise at a later stage. Tax will become applicable only when the father eventually decides to sell the gifted shares. For calculating capital gains at that future date, the cost of acquisition for the father will be the original price paid by the NRI son when he bought the shares, not their market value on the date of the gift.
Additionally, to determine if the gains are short-term or long-term, the holding period of the son will be added to the holding period of the father. This is a significant benefit, as a longer holding period often qualifies for lower tax rates under the long-term capital gains regime.
The expert also confirmed that gifting shares of an unlisted Indian company to a resident relative is permissible under India's foreign exchange regulations, governed by the Foreign Exchange Management Act (FEMA).
Tax on Interest from Income Tax Refund for NRIs
The article also addressed a second, separate query from an NRI living in Canada. This individual sold a property in India during the financial year 2024-25 (FY25), and Tax Deducted at Source (TDS) was deducted on the gross sale value. After filing an Indian tax return and claiming a refund for excess tax paid, the NRI received the refund along with interest, net of TDS. The question was whether this interest component is taxable in India.
Under India's domestic tax law, interest received on an income tax refund is taxable as 'Income from Other Sources'. It would be added to the individual's total income and taxed at their applicable income slab rate, plus any applicable surcharge and cess.
However, for an NRI, there is a potential beneficial route. An NRI can choose to be governed by either Indian domestic law or the provisions of the relevant Double Taxation Avoidance Agreement (DTAA), whichever is more favourable. In this case, the India-Canada DTAA offers a significant advantage.
Harshal Bhuta explains that a tax refund due from the authorities is considered a debt owed to the taxpayer. Therefore, the refund amount qualifies as a debt claim, and the interest paid on it falls under the definition of 'interest' in Article 11(4) of the India-Canada DTAA. Crucially, Article 11(3)(a)(i) states that interest paid by the Government of India to a resident of Canada is exempt from tax in India. This exemption explicitly covers interest paid on income tax refunds.
Since this DTAA provision leads to a tax exemption, it is more beneficial than the domestic law for the Canadian resident NRI. To claim this benefit, the individual must obtain a Tax Residency Certificate from Canadian authorities and submit Form 10F online before filing their Indian income tax return.
These clarifications highlight the importance for NRIs to understand both domestic tax laws and international treaties to optimize their tax liabilities and comply fully with regulations when dealing with Indian assets.
