Provident Funds, fixed deposits, shares -- Implications and guidelines
T. Banusekar
THIS week, `Tax Talk' answers queries relating to Provident Fund Scheme, tax implications of fixed deposits, D-Mat accounts and company shares.
Query
A private limited company gives an option to employees with a basic salary of Rs 5,000 or more to join, either a Provident Fund Scheme (with whom the company has an account) or a Public Provident Fund account with banks or post office. If the employee chooses to join a Public Provident Fund account, he/she would deposit 24 per cent of the basic salary out of which 12 per cent would be reimbursed by the company. If the employee invests in the Provident Fund Scheme, the employer would remit into the scheme 24 per cent of the salary, and recover 12 per cent from the employee.
In such a case while the contribution made by the employer to the Provident Scheme is exempt, it is understood that while remitting into the Public Provident Fund account, the 12 per cent reimbursed by the employer would be taxable in the hands of the employee. Is this a correct assumption? If the same is taxable, please explain why it is so. Also explain why a Public Provident Fund is not recognised.
Vidya
Reply
It is true that any amount up to 12 per cent being the employer's contribution to a Recognised Provident Fund, would not be chargeable to tax in the hands of the employee. This will be in accordance with Section 17(1)(vi) -- read with Rule 6(a) of Part A of the IV Schedule to the Income-Tax Act. However, when the employer reimburses 12 per cent of the salary in respect of a contribution made to a Public Provident Fund account, the same would be taxable under the head, `Salary', in the hands of the employee. Because there is no specific exemption available in respect of such reimbursement.
A Provident Fund would be treated recognised, if recognition for the same is accorded under the IV Schedule by a Chief Commissioner of Income-Tax or Commissioner of Income-Tax. The Provident Fund should also satisfy the conditions prescribed in Rule 4 of Part A to the IV Schedule to the Income-Tax Act and of the Rules made by the Board in this behalf. It would be in the wisdom of the legislature and rule-makers to permit a Public Provident Fund account to be treated as a recognised fund account. Until this is done the reimbursement given by the employer would be treated taxable in the hands of the employee.
Query
My friend's grandmother expired recently. At the time of her death, she had fixed deposits with banks amounting to Rs 5 lakh. My friend's mother is the nominee for the fixed deposits. We wish to know the tax implication on the withdrawal of the fixed deposit and also the income that arises in future. Kindly advise if there are any ways to save the taxes on the interest accrued.
Naveen
Reply
The interest accrued on the deposit with the bank up to the date of death would be taxable in the hands of the deceased. The tax would, however, be leviable and recoverable from the legal representatives of the deceased in a like manner and to the same extent as the deceased (Section 159).
The incomes that accrue after the date of death would be taxable in the hands of the legal heirs in their individual capacity. If, however, the legal heirs cannot be determined with certainty, the income shall be chargeable in the hands of the executor/executors (Section 168).
The income would be taxable in the hands of the nominee, provided she is the legal representative or the legal heir or the executor.
It may not be possible for `Tax Talk' to advise on the methods of reducing taxes on accrued interest. The reader may seek professional advice.
Query
I am a citizen of Nepal. My grand parents expired in 1980. I recently found there are some shares of Indian companies which are in the joint names of my late grandparents. There are also some shares in my father's name. Being a foreign citizen, I wish to know the following:
*How are the shares held in the name of my late grand parents to be transferred to other persons?
*Would any Estate Duty be payable?
*Since most companies now have shares in the D-Mat form, how do I open a D-Mat account in India?
*Can I open a savings account in India in the name of my father, who is Nepalese?
*Can I grant power of attorney to an Indian national to obtain a succession certificate by making an application to the Court and to operate the D-Mat account on my behalf?
*Is the power of attorney to be registered?
*What papers are required as identification to get the succession certificate from the Court and to operate bank accounts?
Binay Rana
Reply
*An application must be made to the company stating that the shares need to be transmitted. For this, sufficient proof of title by the person in whose name the shares need to be transmitted, must be furnished. This proof must be in the form of a succession certificate. The application need not accompanied by an instrument of transfer. The share certificate must be enclosed along with the application. If a transmission fee is prescribed by the company, it should also be remitted.
*The Estate Duty Act in India has been long since abolished. No estate duty is payable in India in respect of person dying on or after 16.03.1985. Since the time limit for reopening under the Act would also have expired, the question of payment of estate duty would not arise.
*For opening a D-Mat account in India, the reader is advised to approach a depository, where an account can be opened.
*A foreign citizen can have an savings bank account in India.
*A power of attorney can be given to an Indian national who may carry out the necessary formalities to make an application before the Court for obtaining a succession certificate and also to operate the D-Mat account.
*It is not required that a power of attorney must be registered in India. However, it may be registered if the party so desires. In this case the registration has to be done with the Registrar.
*The reader is advised to consult a lawyer on the papers required for obtaining the succession certificate. To open a bank account, the reader is advised to approach a banker.
(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

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