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Tax on Gifted Shares & Securities

by | May 6, 2024 | Income Tax, Income from Trading | 0 comments

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Tax on Gifted Shares & Securities

Indeed, the tax implications of gifting shares in India are governed by the Income Tax Act of 1961. When shares are transferred as a gift, it initiates specific tax consequences for both the donor (the person giving the gift) and the recipient (the person receiving the gift). These tax implications are influenced by several factors, including:

  1. Relationship Between Donor and Recipient: The tax treatment varies depending on the relationship between the donor and the recipient. Different rules apply if the gift is between family members and if it’s between unrelated parties.
  2. Value of Gifted Shares: The value of the gifted shares plays a crucial role in determining the tax implications. It’s essential to accurately assess the fair market value of the shares at the time of transfer.
  3. Exemptions and Exclusions: Certain exemptions and exclusions may apply to gift transactions, depending on the circumstances. These exemptions can help reduce or eliminate the tax burden associated with the transfer of shares as a gift.

It’s important for both the donor and the recipient to understand the tax implications before proceeding with the transfer of shares as a gift. Seeking professional advice from a tax consultant or financial advisor can provide valuable insights into the specific tax treatment applicable to their situation.

Gift of Shares & Securities

Exactly, according to Section 56(2) of the Income Tax Act, a gift encompasses the receipt of money, movable property, or immovable property without any consideration or with inadequate consideration. This section delineates the provisions related to the taxation of gifted shares. Shares and securities fall under the category of movable property.

With the advent of electronic delivery instruction slips (e-DIS) introduced by the Central Depository Services Limited (CDSL), trading platforms have facilitated the gifting of stocks, exchange-traded funds (ETFs), and gold bonds. This technological advancement has made it feasible to gift stocks to friends and relatives seamlessly through online platforms.

Tax Implication for Sender on Gifted Shares

On transfer of shares and securities:

With the abolishment of the Gift Tax Act (GTA) in 1988, the sender is not liable to pay tax on gifts. According to Section 2(14) of the Income Tax Act, shares and securities are categorized as Capital Assets. Although the transfer of a Capital Asset typically incurs Capital Gains tax, gifts of shares and securities are exempted from taxation under Section 47, which specifically excludes gifts from the definition of ‘transfer’. Therefore, the sender of the gift is not subject to tax on the gifted shares and securities.

On the sale of shares and securities:

The sale of shares and securities does not attract tax for the sender of the gift. However, if the recipient of the gifted asset is the sender’s spouse or minor child, any income arising directly or indirectly from such asset is clubbed with the sender’s income as per Section 64(1)(iv) & Section 64(1A) of the Income Tax Act. Tax Implications for the Receiver of Gifted Shares:

On transfer of shares and securities:

If the monetary value (FMV) of shares and securities is up to INR 50,000, the gift is exempt from tax. If the FMV of shares and securities exceeds INR 50,000, the gift is considered income from other sources (IFOS) and taxed at slab rates. Shares and securities received from a relative are exempt from taxation since gifts from relatives are exempt under Section 56(2)(vii). Shares and securities received on occasions such as marriage, inheritance, or in contemplation of the death of the payer are also exempt from taxation under Section 56(2)(vii).

On the sale of shares and securities:

Capital Gains tax applies to the sale of shares. When calculating tax on gifted shares, consider the following key points:

  • Period of Holding: Calculate the holding period from the date of purchase by the previous owner (sender of the gift) to the date of sale by the recipient of the gift.
  • Long-Term Capital Gains (LTCG): Applies to equity shares held for more than 12 months from the date of purchase by the sender.
  • Short-Term Capital Gains (STCG): Applies to equity shares held for up to 12 months from the date of purchase by the sender.
  • Purchase Date: Refers to the date of purchase by the previous owner (sender of the gift).
  • Purchase Value: Indicates the value of the purchase made by the previous owner (sender of the gift).
  • Sale Date: Indicates the date of sale by the recipient of the gift.
  • Sale Value: Represents the value of the sale made by the recipient of the gift.
  • Tax Liability: Calculate tax liability based on the nature of the capital asset.
TransactionSenderReceiver
Gift of shares & securitiesNot taxableExempt Income or IFOS Income
Sale of shares & securitiesNot taxableCapital Gains

Let us understand this with the help of an example:

In this case, Rajiv gifted 1000 shares of ABC Ltd to his mother, Shweta, on 01/09/2020, when the Fair Market Value (FMV) per share was INR 200. Shweta sold these shares on 02/03/2021 at INR 400 per share.

For Rajiv:

There is no tax liability for Rajiv upon gifting the shares to his mother, Shweta.

For Shweta:

ParticularsAmount(INR)
Sales (02/03/2021)4,00,000
Purchase (15/02/2020)1,00,000
LTCG3,00,000
Tax @10% u/s 112A (2,00,000*10%)20,000

Reporting in ITR:

For the sender of the gift: The sender is not required to report the gift in their Income Tax Return.

For the receiver of the gift: If the gifted income is exempt, it should be reported under Schedule Exempt Income. If the gifted income is taxable, it should be reported under Schedule OS (IFOS) and taxed at slab rates.

On selling the gifted shares & securities: The income from the sale should be reported as capital gains under Schedule CG. The taxpayer should file ITR-2 and pay tax at applicable rates.

Documentation:

Maintain proper documentation for gift transactions, such as a registered gift deed. This document serves as proof of the gift transaction and can be used to justify its genuineness during scrutiny, helping to avoid charges for tax evasion.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/

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