Tax Implications on Gifting of Shares

The word transfer means a delivery of property, especially stocks and shares, from one person to another.

Transfer of Shares may be by way of Sale, Mortgage, Pledge, Gift, Death, Succession, Inheritance, Bankruptcy.

What is a Gift?

Gift means any sum of money, Moveable property or immovable property which received without consideration or inadequate consideration out of love and affection etc (without quid pro quo)

Tax Implications on Gifting of Shares

Shares and securities are considered as movable property. Trading online and also on apps provide a separate platform to gift stocks, mutual funds and bonds after the introduction of e-DIS (electronic delivery instruction slip) by CDSL. Now it has become easy and a new fad to gift stocks and securities to friends and relatives online.

Tax Implications for the Doner (Sender)

When there is a transfer of shares and securities:

As per Section 2(14) of the Income Tax Act, shares and securities are Capital Assets. The transfer of a Capital Asset is taxable as Capital Gains. However, the definition of ‘transfer’ as per Section 47 specifically excludes gifts. Thus, the gift of shares and securities is not taxable in the hands of the sender of the gift.

Tax Implications for the Donee(Receiver)

When there is a transfer of Shares and Securities

• If the value of shares & securities is up to INR 50,000, then such a gift is exempted.
• The Fair Market Value of shares is more than Rs 50,000 then it shall be taxed under head Income from Other Sources as per the slab rates for a non-relative.

Valuation of Shares Received as Gift by a Non-Relative

• Shares and Securities received as a gift from Relative {Section 56 (2) (vii)} shall be wholly exempted.
• Shares & Securities received on the occasion of marriage or inheritance or in contemplation of death of payer is exempt income since such gifts are exempt as per Sec 56(2)(vii)

When does Capital Gain Arise?

Capital Gains tax would arise on the sale of shares. If not falling under IV -F of the Income Tax Act,1961.

Calculation of Capital Gain

• Period of Holding: Calculate the holding period from the date of purchase by the previous owner i.e. sender of gift to the date of sale by the receiver of the gift.
• LTCG: Equity Shares held for more than 12 months from date of purchase by the sender to date of sale.
• STCG: Equity Shares held for up to 12 months from date of purchase by the sender to date of sale.
• Purchase Date: The date of purchase by the previous owner i.e. sender of the gift
• Purchase Value: The value of the purchase to the previous owner i.e. sender of the gift
• Sale Date: The date of sale by the receiver of the gift
• Sale Value: The value of the sale to the receiver of the gift
• Tax Liability: Calculate tax liability as per the nature of the capital asset (Short term or Long Term Capital Asset)

FAQs

How to report in ITR?

The receiver of the gift should report the gift under Schedule Exempt Income if the income is exempt or Schedule OS under Income from Other Sources,if the income is taxable. If the gift is taxable, calculate tax liability at slab rates.

On the sale of such shares & securities, report income as capital gains under Schedule CG. The taxpayer should file ITR-2 on the income tax website and pay tax at applicable rates.

Is it necessary to execute a gift deed?

Documentation is always advisable for any scrutiny also to justify the genuineness of the gift transaction and avoid charges for tax evasion.

Can Shares be gifted to a friend?

If the monetary value of the gift is up to INR 50,000, it is t exempt as per Sec 56(2)(vii).

If the monetary value of the gift is more than INR 50,000, it is taxable in the hands of the receiver as Income From Other Sources and taxed at slab rates.

However, if the gift is given on the occasion of marriage, it is exempt as per Section 56(2)(vii) of the Income Tax Act.