Is gratuity taxable?

T. Banusekar

I purchased 1,000 shares of Rs 10 (Rs 10 face value and premium of Rs 2) in the IPO of Hughes Telecom an infrastructure company (telecom) which was eligible for section 88 benefits. I would like to know whether I could claim rebate for the entire Rs 12,000 or only on Rs 10,000.

Sanjay Sethia

Reply

Sub-section (2) of Section 88 refers to the sums paid or deposited in the previous year by an assessee out of the income chargeable to tax. These sums also include a sum paid or deposited as subscription to equity shares or debentures forming part of any eligible issue of capital. This is provided the same is approved by the Board on an application made by a public company, or as subscription to any eligible issue of capital by any public financial institution] in the prescribed form.

Thus if the Hughes Telecom IPO has been approved by the board, the rebate will be available on the entire Rs 12,000 and not only on Rs 10,000 as it is Rs 12,000 which has actually been paid.

Query

I am the holder of a British passport. I visit India once a year for not more than two months at a time. I am over 65 years old, and now I want to settle in India permanently with my relatives. In this background I request you to answer the following questions:

1. I receive a monthly pension from a UK company, which will be directly credited into a bank in India. Is this sum taxable in India?

2. What would be my residential status under the Income-Tax Act? I will be returning to India permanently after more than 20 years.

3. If I bring some amount of money from the UK to India, will the same be taxable? Will the interest income therefrom be taxable?

4. In terms of taxability, does it make a difference if I retain my UK citizenship?

5. Out of the pension, if I gift any sum to my relatives, would the same be taxable?

Premkumar

Reply

The scope of total income is contained in Section 5 of the Income-Tax Act. The taxability of income chargeable under the head salaries will be as shown in the Table. One can see that the income received in India by a direct credit to a bank account in India will be taxable, irrespective of the residential status in accordance with the ITA.

However, Section 90(2) provides that a person may apply either the provisions of the ITA or the provisions of the Double Taxation Avoidance Agreement (DTAA), whichever is beneficial to him. Article 4 of the DTAA between India and the UK defines the term `resident of a contracting state' in the following manner:

1. For the purpose of this Convention, the term `resident of a contracting state' means any person who, under the law of that state, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2. Where, by reason of the provisions of paragraph 1 of this article, an individual is a resident of both contracting states, then his status shall be determined in accordance with the following rules:

*He shall be deemed to be a resident of the contracting state in which he has a permanent home available to him. If he has a permanent home available to him in both contracting states, he shall be deemed to be a resident of the contracting state with which his personal and economic relations are closer (centre of vital interest);

*If the contracting state in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either contracting state, he shall be deemed to be a resident of the contracting state in which he has an habitual abode;

*If he has an habitual abode in both contracting states or in either of them, he shall be deemed to be a resident of the contracting state of which he is a national;

*If he is a national of both contracting states or of neither of them, the competent authorities of the contracting states shall settle the question by mutual agreement.

3. Where, by reason of the provisions of paragraph 1 of this article, a person other than an individual is a resident of both contracting states, it shall be deemed to be a resident of the contracting state in which its place of effective management is situated.

From the details given by the reader it appears that he is a resident of India in accordance with the DTAA. Articles 19 and 20 of the DTAA talk of the taxability of pension, Article 19 of pension paid by the Government, and Article 20 of other pensions.

It appears that the reader does not receive pension from the Government of UK and, therefore, the discussion is restricted only to the taxability in accordance with Article 20. Under Article 20, pension paid to a resident of India is to be taxed only in India. Hence it can be seen that no benefit can be derived from the DTAA as is the position under the ITA. The income would be taxable only in India.

The residential status of an individual is to be determined in the following manner.

Basic conditions

*He is in India in the previous year for a period or periods aggregating in all to 182 days or more.

*Having been in India for a period of 365 days or more during four years preceding the previous year, he has been in India for 60 days or more during the previous year.

Exceptions to second condition

*In the case of an individual being a citizen of India who leaves India in any previous year as a member of the crew of Indian ship as defined in the Merchant Shipping Act, 1958 or for the purpose of employment outside India, 60 days shall be substituted by 182 days.

*In the case of an individual being a citizen of India or person of Indian origin who being outside India comes on a visit to India in any previous year, 60 days shall be substituted by 182 days.

Additional conditions

*He has been a resident in India for 9 or more years out of 10 years preceding the previous year.

*He has been in India for a minimum period of 730 days in 7 years preceding the previous year.

Resident and ordinarily resident

An individual will be a resident and ordinarily resident in India if he satisfies one or both basic conditions and both additional conditions.

Resident but not ordinarily resident

The individual satisfies one or both of the basic conditions and one or none of the additional conditions.

Non-resident

An individual not satisfying any of the basic conditions is a non-resident. It is not relevant whether or not he satisfies the additional conditions.

Therefore, for the previous year 2001-02, depending on when the reader returns to India, he may either be a non-resident or a resident but not ordinary resident. In the subsequent year, that is 2002-03, the reader would be a resident but ordinarily resident, and this status will continue for nine years from the year in which he attained the status.

Any amounts brought into India while coming to permanently settle in India will not become taxable merely because the same was brought into India. However, the same may have been taxable in India in earlier years when it was earned. As regards interest income from out of the investment made with the monies brought into India, the same would be taxable in India except if it is an interest earned from out of a scheduled bank from deposits in foreign currency.

This exemption is available only where the acceptance of such deposits is approved by the RBI and during the years when the person is a non-resident or a resident but not ordinarily resident. There would be no difference on the taxability or otherwise of any income on the basis of citizenship of any country under the ITA.

Where any part of the pension is gifted to relatives, no tax is payable in respect of the gift. However, if the gift were made to a spouse, minor child, son's wife or HUF of the reader, the income earned out of the gifted sum would be clubbed in the hands of the reader.

(The author is a practising chartered accountant, Chennai.)

(Business Line invites queries on personal taxation issues to this column. They will be answered in the first Sunday's issue of Business Line every month. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600002, or by e-mail to vaidy@thehindu.co.in )