The Hindu Business Line : Tax on selling ESOP back to company

I work for an unlisted company and have been allotted shares under the employee stock option plan. The company has recently come out with a buyback scheme and I sold the shares in tranches to the company. What will be the tax implications on the sale of these shares, which I have held for over a year? What are the avenues available for reinvestment to save capital gains tax? — Vijay

The capital gains arising will be treated as long-term because you have held the shares for more than 12 months. Tax can be levied on such capital gains at 20 per cent (as increased by the appropriate surcharge and additional surcharge). You can claim exemption either u/s 54F or u/s 54EC by making reinvestment.

For exemption u/s 54F, the assessee should be an individual or HUF, the gain from the transfer of the long-term capital asset should not be a residential house, the assessee should not within two years purchase or three years construct any residential house other than the new house and the assessee should not be the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.

The quantum exempt will be the entire capital gain if the investment is more than or equal to the net consideration. The exemption will be the investment multiplied by the capital gain and divided by net consideration, if the amount invested is less than the net consideration.

Exemption u/s 54EC is available if the asset transferred is a long-term capital asset, the investment is in bonds of the NHAI or the Rural Electrification Corporation, the bonds are redeemable after three years and reinvestment in bonds should be made before six months from the date of transfer of the capital asset.

The exemption under this section would be restricted to the investment made in such bonds and such investment cannot exceed Rs 50 lakh in a financial year.

I booked a flat in 2006, which is under construction in Mumbai. Possession of the flat is likely in late 2009. The flat is booked in the names of my husband and I. We have paid about 45 per cent of the consideration mainly out of our own savings. We propose to sell a flat owned by us (purchased in 1997) and use the proceeds to pay the balance to the builder for the Mumbai flat.

Please advice what will be the capital gains tax implications, particularly where the balance payment for the flat booked is to be met out of the sale proceeds of the existing flat. — A. Sasikala

Section 54 of the Income- Tax Act provides for an exemption to an individual or HUF where there is a transfer of a residential house and on reinvestment in another residential house where the residential house transferred is a long-term capital asset. Such reinvestment may be by way of purchase or construction of the new residential house.

The reinvestment by way of purchase is required to be made within a year before or two years after the date of transfer and in case of construction, the same is required to be completed within three years from the date of transfer.

The entire capital gain is exempted if the amount invested is more than or equal to the capital gain, or if the amount invested is less than the capital gain, the exemption is to the extent invested.

You may note that it has been held in CIT v J.R.Subramanya Bhat [1987] 165 ITR 571 (Kar) and CIT v H.K.Kapoor (Decd) Through LR [1998] 234 ITR 753 (All) that the commencement of the construction is not relevant for the claim of exemption but what is relevant is the completion being within three years from the date of transfer of the original asset.

As you are constructing the flat using the sale proceeds of the existing flat and as you would be completing the construction within three years from the date of transfer of the existing flat, you can claim the exemption u/s 54 subject to the above limits and only the balance will be subject to capital gains tax.

I own land that was bequeathed to me. I propose to sell a part of the plot to an institution. I will pay the capital gains tax and divide the rest equally among me and my five brothers and two sisters. Will there be any tax implications on the gift received in the hands of my siblings? Can my siblings and I execute a sale deed and share the proceeds equally, paying tax in our individual hands. — Suresh

The capital gains tax will be in your hands even if the sale deed is executed by all of you as the land is owned by you.

There will be no tax on such a gift. Though section 56(2) provides that any money received without consideration is to be taxed as income, you may note that there are certain exclusions, which includes a gift by an individual to a relative as defined in the section. A relative would includes a brother or a sister of the individual.

Note that you are only seeking to distribute the post-tax proceeds received on the sale of the land and that the entire capital gains which arises in your hands is already taxed in your hands.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002)

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