Gift is a transfer of movable or immovable property from one person to another without consideration. Shares of an Indian company or of a company incorporated outside India can be gifted to another person (relative or otherwise) by following certain procedures and subject to compliance under different legislations.
This article focuses on the permissibility of gifting securities under the relevant provisions of Foreign Exchange Management Act, 1999 (FEMA) and rules, regulations made thereunder and the tax implications, as of date, on such gift of securities.
Permissibility of gifting of shares involving a Non-Resident under FEMA
In case of Gift of shares of an Indian Company involving a Non-Resident
FEMA is enacted to govern foreign exchange in India with the objective of facilitating external trade, payments and for promoting the orderly development and maintenance of foreign exchange market in India.
The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the "FDI Rules"), and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 which supersede the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (the "TISPRO") contains provision of transfer of security of an Indian company.
The FDI Rules allow transfer of shares of an Indian company to/from a Non-Resident in the form of gift, as the Act considers gift as one of the modes of transfer of security. However, this is subject to conditions as below:
I. Transfer by way of gift by Non-Resident (not being NRI or OCI) to another Non-Resident is permitted, subject to the following conditions:
a) prior Government approval is required for any transfer in case the company is engaged in a sector which is under Government approval route;
b) if the shares are held by the transferor on non-repatriable basis, to a transferee who intends to hold on repatriable basis, then it shall be subject to the adherence of compliances such as entry routes, sectoral caps, investment limits and reporting requirements for such transfers, as prescribed under FDI Rules;
II. Transfer by way of gift from Non-Resident to Resident is permitted, subject to the following conditions:
a) the transfer by way of gift shall be in compliance with and subject to the adherence to documentation and reporting requirements for such transfers as may be specified by the Reserve Bank from time to time;
b) these provisions shall not apply to transfer by the Non-Resident who is holding shares on a non-repatriable basis.
III. Transfer by way of gift by Resident to Non-Resident:
This require prior approval of the Reserve Bank of India and such approval is subject to the following conditions:
a) the Donee is eligible to hold such a security under FDI Rules as amended from time to time;
b) the gift does not exceed five percent of the paid-up capital of the Indian company or each series of debentures;
c) the applicable sectoral cap in the Indian company is not breached;
d) the Donor and the Donee shall be “relatives” within the meaning in clause (77) of section 2 of the Companies Act, 2013;
e) the value of security to be transferred by the transferor together with any security transferred to any Non-Resident as gift during the financial year does not exceed the rupee equivalent of USD 50,000;
f) such other conditions as considered necessary in public interest by the Central Government.
Reporting Requirement under FEMA Regulations
Form FCTRS will have to be filed within 60 days from the date of transfer of shares by way of gift. The onus of submission of the Form FC-TRS within the given timeframe would be on the Donor or Donee, resident in India. The Form FC-TRS to be submitted through FIRMS Portal.
In case of Gift of shares of a Company incorporated outside India involving Resident
The Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations 2004 (ODI Regulations) governs transfer of shares by way of gift of shares of a foreign company between resident and non-resident.
The RBI has provided general permission for transfer of shares by non-resident held in a foreign company by way of gift to a resident. However, any transfer of shares of foreign company between two Residents in India or from a resident to a non-resident will require prior approval.
Current Scenario of Gift tax in the Income Tax Act
In the hands of donee
As per section 56(2)(x) of the Income Tax Act, 1961, any person who receives the shares by way of gift shall having total fair market value exceeding INR 50,000/-, shall be considered as deemed income in the hands of done.
In the hands of donor:
Gift of shares is exempt in the hands of donor in terms of section 47 of the Income Tax Act, 1961.
In case of gift of shares in case of following:
(i) from any relative*; or
(ii) on the occasion of marriage of an individual; or
(iii) under a will or by way of inheritance; or
(iv) in contemplation of death of the donor; or
(v) from any local authority; or
(vi) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution; or
(vii) from or by any trust or institution registered; or
(viii) by way of transaction not regarded as transfer; or
(ix) from an individual by a trust created or established solely for the benefit of relative of the individual; or
(x) from such class of persons and subject to such conditions, as may be prescribed.
The Income Tax Act defines relative in relation to an individual, to mean the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
Bringing it together,
Gifting between residents is under Indian Companies Act processes and Income Tax Act. Additionally, for gifting of shares between resident and non-resident FEMA regulations are applicable. Some start-ups, have opted gift of shares towards remuneration or to avoid dilution of shareholding of existing shareholders. It is pertinent to note that non-adherence to the compliances detailed might cause adverse impact, which might even be unwinding the transaction, let alone tax implications.