Am opening this thread in the Indian Finance sub-forum.
Am not sure if a there is a an old thread with the same title. If there is one, perhaps the two threads can be interlinked. If there are other threads that have discussed the issue (but not exclusively), perhaps relevant posts can be copied to this thread.
Investing in Senior citizen scheme (SCS), POMIS, PPF etc in parents' names come to mind. Also parents are eligible for their own individual income tax exemption limits (higher for senior citizens) in India. Any taxable income that they have will also likely attract tax at a lower rate because they may not be in the same high tax bracket as their children.
When investing in India resident parents' names (say via gift to them), I believe that things need to be structured such that Benami law and tax law's clubbing of income provisions are not attracted.
I will post info as and when time permits.
I believe that Rajesh's input on structuring things safely would be helpful. ---------------------------------------------------------
Deleting and reposting #2 to make it more readable.
Suppose S (major son) gifts money to his father (F) who is resident of India and a senior citizen, by drawing a cheque in F's favor, which F deposits into his account. The gift contains no strings.
Subsequently F deposits the money in a senior citizen scheme (SCS) account, and when opening the account, nominates S which means S is to receive the money in the account upon F's demise. F uses the interest earned in SCS for F's benefit.
Instead of SCS above, one could think of POMIS or even a PPF account.
Do the above transactions taken together attract clubbing of income provisions under India tax law? In particular, do the above transactions (in view of the nomination of S in the SCS account of F) constitute a revocable transfer within the meaning of Sections 61 and 63 of Indian IT Act (on the grounds that the nomination of S in the SCS account of F amounts to an indirect retransfer of the money given to F by S)?
------------------------- Revocable transfer of assets. 61. All income arising to any person by virtue of a revocable transfer23 of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income.
Transfer and revocable transfer defined.
2463. For the purposes of sections 60, 61 and 62 and of this section, (a) a transfer25 shall be deemed to be revocable if (i) it contains any provision for the re-transfer directly or indirectly25 of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets ; (b) transfer25a includes any settlement, trust, covenant, agreement or arrangement25a.
To make it abundantly clear that the gift from S to F in #2 came without any strings attached, and that F of his own sweet volition entered the name of S as nominee in F's SCS account, suppose S gives a letter - or signs an affidavit, duly notarized by paying 100 or 200 rupees to the notary public sitting under a tree near the city court house in India - along the following lines to F, when giving the gift cheque to F:
-------------
Dear Pitashri (Daddyji):
Please find enclosed cheque for 10 lac rupees in your favor which is being given as a gift to you by me on the occasion of your birthday. It is merely a small way in which to show my filial love to you, and it would my pleasure if you use the money in any way you deem fit. As always, I remain assured of your love for me. With best wishes for a long, healthy life.
Your beloved son,
S
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Clearly F was under no legal obligation to nominate S as the nominee in the SCS account or even open a SCS account. F could have used the money anyway F liked and/or named anyone as nominee.
It is entirely another matter that S and F may have privately discussed how F is going to invest the gift money. F could have nominated anyone, but chose to nominate S.
Will the nomination of S by F (in the SCS or POMIS or PPF account) give the transactions the color/hue of an indirect recovable transfer within the meaning of Section 61 and 63 and attract clubbing of income provisions? I am inclined to believe that the answer is NO.
I would love to hear from Rajesh about his opinion on the above. Thanks. ____________________________________________________________________
From: Bobus175------------------------------------------------------------------------------------------Sent: 3/18/2006 11:44 PMOpinion of S.Rajaratnam, a retired senior IT officer.
Q: Is it possible for a son, who is not a senior citizen to invest in such account in the name of his mother, a senior citizen, so as to provide the intended pensionary benefit for the mother? If so, should mother disclose the source of her income? A: The scheme is not meant for benami investments. In fact, Benami Transactions (Prohibition) Act, 1988 permits investment only in the name of wife and unmarried daughter, subject to the presumption of gift in their favour. If, however, a person makes a bona fide gift to the mother, so that it becomes her property, there is no bar for the mother making a deposit, since it will be her money. The source of every deposit under Senior Citizens Saving Scheme, 2004 or for that matter any other deposit, is bound to be established as from accounted or accountable sources. If not Sec. 69 would authorise the assessing officer to treat such amount, for which source is not established, as taxable income. If the source is explained by mother as gift from the son, the son is bound to explain the source. The scheme is not intended to be abused, so as to provide shelter for unaccounted money or provide a profitable source of investment by persons other than senior citizens in their names.
Extract [LIST=1] Mere provision is sufficient ? actual retransfer or reassumption is not necessary For a transfer to be revocable so as to apply clubbing provisions a mere provision for retransfer or right to reassume power is sufficient and it is not necessary that the actual retransfer or reassumption of power must take place. [CIT vs. S. Ranghbir Singh, (1965) 57 ITR 408, 413 (SC)] Transfer does not become revocable merely because the transferor has obtained a benefit In Mrs. Leela Nath vs. CIT (1982) 134 ITR 507 (Cal) it was held that mere transfer or enjoyment of any income or asset of the trust etc. by settlor-transferor without there being reserved any right in the transfer deed itself would not make the transfer revocable Transfer would be revocable even if the retransfer or reassumption is made dependent on a contingency Even if the provision for retransfer or reassumption is dependent on a contingency the transfer would be considered as revocable as the law does not specify that the said provision must be absolute or unqualified. [Tarunendra Nath Tagore vs. CIT (1958) 33 ITR 492 (Cal). Also see, Ramji Keshavji vs. CIT (1945) 13 ITR 105 (Bom), CIT vs. Rani Bhuwaneshwari Kuer, (1962) 45 ITR 357 (Pat), affirmed, (1964) 53 ITR 195 (SC)] Transfer is revocable only if right of retransfer vests in the transferor (and not some other person) The prefix "re" in the expressions "retransfer" and "reassume" implies that the retransfer of income or asset or reassumption of power must be with respect to the original transferor and not some other person [CIT vs. Trustees of Sreeram Surajmull Charity Trust (1971) 79 ITR 649, 667 (Cal) ] In CIT vs. Ratilal Nathalal (1954) 25 ITR 426 (SC), the settlor was a Hindu undivided family and the trust deed was executed by two sole surviving coparceners representing the family. The trust deed contained provisions giving the income back to one of the coparceners. It was held that there was no retransfer to the original settlor, viz., the Hindu undivided family and hence the transfer was not a revocable one. [/LIST]------------------ In the example of the gift of 10 lacs from S to F, the gift is bonafide, and contains no provision of reassumption of rights over the 10 lacs by S. Hence am inclined to believe that the gift is not a revocable transfer, even though F subsequently (and voluntarily) nominated S in the account that F opened. F has the freedom to change the nomination to someone else. The clubbing provisions are deeming provisions. So I believe they ought to be interpreted strictly and in the case of doubt, the benefit ought to go to the tax payer.
From: newbie---------------------------------------------------------------------------------------------Sent: 3/19/2006 8:39 AM
My father is retiring in a few months. He would be 58 yrs of age then. My question is regarding the investment in SCSS.
I read that the limit to invest in the scheme is 15,00,000/- per person and the amount has to come from his own retirement benefits (PPF, Superannuation, Gratuity, etc) in case the person is less than 60 yrs old.. Is this information correct?
My mother at the time of my Dad's retirement would also be above 55yrs. Can we invest any amount in excess of 15,00,000/- in her name.
If he also opens POMIS account, is it advisable to have a recurring account with the post office and let all monthly income from POMIS and quarterly be deposited in this one account (not sure if this is possible though). Or should he open separate PO recurring account (for POMIS income) and savings account with SCSS bank.
What are the other good options to invest in for his retirement as he would not be getting any pension? His aim is to generate around 30-35 K per month.
Any advide from Bobus and other members is appreciated.
Who can apply The scheme is available for citizens above 60 years of age; however a provision has been put in place for individuals who have crossed 55 years of age. Such individuals may invest subject to the conditions that,
The person has retired under a voluntary retirement scheme or a special voluntary retirement scheme on the date of making the investment,
The investment is made within three months of the date of retirement, And a certificate from the employer, indicating the fact of retirement, retirement benefits, along with period of such employment with the employer, is attached with the application form.
Non-Resident Indians and Hindu Undivided Families are not permitted to invest in the scheme.
Bobus will there be inheritence tax to S on the gift given to F (god forbid)?
Gift and inheritance are different. Inheritance tax or estate duty can arise only upon death. In the example, no one is dead, at least not yet.
In any event, both gift tax and estate tax/duty have been abolished in India.
However, per Section 56(2)(v) of Indian Income Tax Act, some (not all) gifts over 25,000 rupees are deemed to be income of the donee (recipient of gift). A gift from one relative to another (like from son to father) is exempt from this deeming provision.
Gifts between some (not all) relatives invite the clubbing of income provisions of Section 64 of India Income Tax Act. A gift from a son/daughter to a father/mother is not one such gift. So I have restricted attention to clubbing provisions that apply to revocable transfers.
From: RockingIndia----------------------------------------------------------------------------------Sent: 3/20/2006 9:08 AM
Bobus,
In the example you gave, son S gives a gift to father F, can F opena POMIS/Senior Citizen account and make HUF of son, H_S the nominee without any tax implications?
This can be a effective way of transfer of wealth (eventually) to a different tax entity (H_S) without entering into clubbing provisions.
I believe HUF is allowed as a nominee in SCSS (senior citizen savings scheme). However, the rights of women members of the HUF seem to depend on state laws, and am not sure how the same can be protected, if one wishes to. Further, while gift from major son to father is beyond the clubbing provisions of Section 64, if HUF of son's nuclear family (and its branch) is made nominee, since wife of major son would be a beneficiary of HUF, I dont know whether the gift and subsequent nomination taken together would amount to an indirect transfer from major son to his wife, and invite Section 64 provisions.
While it is nice to have taxable income and assets in HUF name, I am not sure of all the implications thereof, and would proceed with caution. I had started a thread on the subject (a few weeks ago), but have not devoted much time to it.
Apart from the issue raised earlier in this thread, if you can shed light on the following, I would appreciate it.
Since an NRI cannot buy agricultural land in India per FEMA regulations, what do you think of the following route? Suppose an NRI male gifts 20 lacs of money via NRE cheque to his mother who is resident of India. The mother imediately buys agricultural land with the gifted money. In her will, the mother stipulates that upon her demise, the agricultural land should go to her NRI son as inheritance. Will the gift and subsequent inheritance be taken together and read as a devious illegal way to circumvent FEMA? ______________________________________
I want to clarify that in the route proposed in #14, the NRI son does not enjoy any of the fruits (income, if any from agri land) of the agri land bought by his mother from the money gifted by him to his mother, until he inherits the same. Should the NRI son still be worried about the provisions of the Benami Transactions Act?
Thanks for reply to #12 and alerting to Section 64 provisions, which escaped me.
I always thought assets passed on death (whether by nomination or will) are not subject to clubbing irrespective of source of such assets. (No reference material to come upon that conclusion, rather inability to find any on that topic)
I didn't quite understand the following: "However, the rights of women members of the HUF seem to depend on state laws, and am not sure how the same can be protected, if one wishes to." If it's the HUF of the son's nuclear family, which women's rights are we talking about? Wife of S in #12? Intention is to pass the assets to the HUF and grow it under a taxable entity.
Anyway, my understanding is Section 64 applies only to major son's wife, not to major daughter's husband. So for #12, if the daughter D who has independent income and is married to DH, gives a gift to father F, can F open a POMIS/Senior Citizen account and make HUF of DH, H_DH the nominee without any tax implications? Again, intention is to pass the assets to the HUF and grow it under a taxable entity.
From: RockingIndia-------------------------------------------------------------------------------Sent: 3/27/2006 12:17 PM In #16 above in the last para, F is father of teh daughter F, not the father of DH!
Dear Bobus, 1. If an NRI son gifts funds from NRE A/c or from abroad, to his Resident father, who in turn invests such amount in Senior Citizen Scheme and appoints the NRI son as nominee, the same is not - " a revocable transfer under the Tax Laws nor would attract clubbing provisions under the Income Tax Law nor is a breach of provisions of rules pertaining to Senior Citizen Scheme or any other law that I am aware of. .02 You are right in your conclusion and also the reasoning thereof. .03 However, if an NRI gifts money to his Resident uncle and in turn uncle makes gift of similar amount or any amount out of such funds to his major son, the same can be questioned by Income Tax Authorities.
2. I.T. Authorities may come to a conclusion that the mode is adopted to circumvent income tax payable by the paternal cousin , who is not being covered by the definition of relative and hence, not eligible for exemption.
3. However, if the case was an alternative of prior gift by NRI , than , although the same may be questioned , but the donee may have a case to argue , say for example ; .01 Resident uncle makes a gift to his son in Year 2005-06 say, before 31st March ; .02 NRI nephew sends a gift to his Aunt in year 2006-07 ; .03 This would provide a cushion of - i ) Resident father gifting the money to Resident son prior to receipt of gift from NRI nephew by resident aunt will dilute the substance of indirect transfer. ii) Gift by Resident father to son and by nephew to Aunt will also dilute the concept of indirect transfer and iii) change of years will reduce the possibilities of direct catchment. iv) This gift has a moralistic argument too - Of an NRI nephew learning about his uncle gifting away money to his cousin may think it appropriate to send money to aunty and uncle for their personal maintenance.
4. The Benami Transactions ( Prohibition ) Act, 1988 defines " Benami Transactions " as a transaction wherein a property is transferred to one person for the purchase price being paid by another person. .02 Apparently, the said transaction is technically also not covered by Benami Transaction Act. .03 Such a transaction will also not contravene the provision of Foreign Exchange Management Act or any other Statutory rules as the gift is genuine and bonafide ; the relationship is also very close ; the donor being the son has sufficient capability to gift such amount and the purpose of gift is natural love and affection.
5. The same analogy applies to purchase of agricultural land. Accordingly, an NRI son can gift say Rs.20 lacs to his resident mother, who may purchase agricultural land from the said amount of gift and subsequently provides for such agricultural land to be inherited by her son by way of a Will.
6. To the best of my knowledge, such genuine transactions are not contravening provisions of any of the Statutes.
Can NRIs/USC, to avoid PFIC implications do the following
# Gift a sum of say 5 lacs to his mother or father who inturn buys a equity oriented mutual fund in india
# 3 years down the line, the mother/father sells the mutual fund for 6 lakhs (gain of 1 lac)
# Gifts the 6 lacs back to dear son (towards the purchase of his first house - to add a sentimental twist )
Now lets say that this indeed is a revocable transfer (refer to post 3). The gains (1 lac) - since this is LTCG, will tax liability be 0 for NRI son or will it be treated as ordinary income or other? Is this a way of avoiding PFIC implications?
Thank You ________________________________________________________
No adverse effects to resident parent via Section 56 of IT Act (which deems some gifts above 25K rupees to be income of recipient) since a parent is a relative.
Gift to father/mother from son is not covered under Section 64's clubbing of income provisions.
The gift to parent would not be considered revocable as long as it does not comes with some strings i.e. a legal agreement that parent would gift again to son.
And as you pointed out, even if clubbing of income provisions were invoked, the nature of investment (equity oriented fund) is such that long term cap gain from the same is tax exempt.
US Law
I assume parent is not a US resident for tax purposes. Else, parent would have to deal with the PFIC nightmare, something many of us would not wish for ourselves, and even less for our parents.
Also the son who is US resident should take care not to inherit (due to unanticipated demise of parent) or be gifted the PFIC investment itself. It ought to be liquidated prior to inheritance or gift to US resident. Else, son would be saddled with a PFIC investment.
Assuming the above have been taken care of, what worries is that the arrangement seeks to avoid US tax (on US resident), not just US tax on PFIC investments, for the period between the two gifts, and hence may not be viewed favorably by IRS. This is a very grey area.
Legally a US resident can gift upto $12K per year per recipient without any gift tax consequences. And a US resident can accept a gift from a foreign donor upto $100K without any need to report it.
Reciprocal Gifts. The IRS has long recognized that there are benefits in taxpayers making gifts which benefit themselves.[23] For example, if three brothers each give $10,000 to each other brother?s 3 children, all have increased their family?s assets by $60,000 tax free(i.e., gifts to two sets of three nephews and nieces at $10,000 each).
Because of the benefit to the donor, the IRS may deny the gift under the ?reciprocal gift doctrine.? In U.S. v. Grace Est.[24], the Supreme Court held that ? the application of the reciprocal trust doctrine requires only that the trust be interrelated and that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as they would have been in if each had created his own trust with himself, rather that the other, as life beneficiary?. In order to avoid the doctrine?s application, consider one or more of the following[25]:
If trusts are used, appoint a different third party as the trustee of each trust and vary the interest of any beneficiaries of any trust. Make gifts at different times. Make gifts of different amounts
[23] See: ?Planning to Avoid the Reciprocal Trust Doctrine,? Estate Planning, October 1999; ?Tax Court Denies Annual Exclusion for Reciprocal Gifts,? CPA Journal, February 2000.
[24] 395 U.S. 316 (1969), rev?g 393 F.2d 939 (Ct. Cl. 1968). See also Estate of Schuler, T.C. Memo 2000-392.
[25] These rules are extremely ambiguous and through research should be made before attempting a gift that has reciprocal gift implications.
From: vivmat---------------------------------------------------------- Sent: 4/2/2006 1:16 AM
"what worries is that the arrangement seeks to avoid US tax (on US resident), not just US tax on PFIC investments, for the period between the two gifts, and hence may not be viewed favorably by IRS"
I am still trying to understand arithmetic. Answering your questions properly would require knowledge of measure theory. ______________________________________________________
Here is a portion of Section 64 that deals with HUF. Note the presence of the words "directly or indirectly" in the extract below:
------------------ Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it 50[into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property)], then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971 (a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly
(b) the income derived from the converted property or any part thereof5152[* * *] shall be deemed to arise to the individual and not to the family ; --------------
Regarding the other question: HUF laws seem to vary from state to state. In some states, female members have virtually no rights. If I convert any of my property into HUF property, I would want to make bloody sure that my wife and daughters will have some say or rights over the property, not just my sons. I would like to think my sons will be saints, but do not want to bank on that. That is all I had in mind when I talked of making sure rights of women are protected.
Bobus175 (Original Message)--------------------Sent: 3/17/2006 3:34 PM
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