Receiving shares as a gift from a parent, spouse, or another relative means you are becoming the legal owner of the shares, but do you know the tax consequences? The tax treatment also becomes important because gifting shares itself and selling gifted shares are two separate tax events.
Assuming it is a case of a gift by an individual to a specified relative, where there is no tax implication in the hands of the recipient at the time of receipt. The answers could vary depending on the tax treatment of the gift, if it is not covered by one of the exemptions,
One of the biggest questions taxpayers often face is this: when calculating capital gains, should you consider the value of the shares on the day you received the gift, or the price at which the original owner bought them?
So, if you have received shares as a gift or are planning to transfer shares to a family member, understanding which purchase price is considered, how the holding period is calculated and when capital gains tax becomes payable can help you avoid an unexpected income tax scrutiny from the tax department.
STORIES YOU MAY LIKE
Here’s what the Income Tax rules say about the cost of gifted shares and how you should calculate your taxable capital gains when you sell them.
ALSO READ
Tax rules on gift of shares from relative vs non-relative
Under India’s income-tax law, shares received by an individual as a gift from specified relatives such as a spouse, brother, sister, or lineal ascendants or descendants on either the maternal or paternal side are generally not taxable in the recipient’s hands, irrespective of the gift’s value.
“If the shares gifted by relatives are subsequently sold, the recipient will generally inherit the donor’s cost of acquisition and holding period for determining the applicable capital-gains tax treatment,” said Rajat Singhi, Partner, Price Waterhouse & Co LLP.
Cost of acquisition of gifted shares is generally deemed to be the cost that would have been available to the previous owner, together with any eligible cost of improvement incurred by the previous owner or the recipient.
Similarly, for determining the holding period, the recipient is generally entitled to include the period for which the shares were held by the previous owner. As a result, both the tax cost and holding history of the donor may be carried forward to the recipient and become relevant in determining the tax consequences when the shares are eventually sold.
“If such gifts having fair value in excess of Rs 50,000 are received from any non-relative, then such gifts would be taxable in the hands of the recipient as income from other sources. However, the recipient shall be eligible to claim such a taxable amount as their “cost of acquisition” for determining the applicable capital-gains tax treatment,” Singhi further explained.
While giving / receiving such gift of shares, one should be mindful of depository participant charges and / or stamp duty obligations that may arise on account of such gift deeds / gift documentation which typically depend on the relevant state’s stamp duty regulations.
Taxpayers should maintain supporting documentation, including an executed gift deed / documentation, proof of the relationship, the donor’s purchase documents, demat statements, bank statements etc. to establish the nature and source of the gift of shares.
ALSO READ
Gifted shares: Know the tax rules for listed and unlisted shares
For listed shares, the fair market value is determined based on the lowest price quoted on the stock exchange on the date of receipt (or the immediately preceding trading date, if there has been no trading on the date of receipt).
“The fair market value of unlisted equity shares is computed based on a hybrid method. The tax is levied at the ordinary applicable rate (that could be as high as 30% plus surcharge and cess, for Indian residents),” said Rahul Jain, Partner at Khaitan & Co.
“For shares received as a gift from specified relatives, the cost of acquisition is the price that was paid by the donor to acquire the shares. Similarly, the period of holding for the done shall be reckoned from the date of acquisition of shares by the donor,” Jain further added.
Gifted shares sold later: Which purchase price counts for tax?
Where shares are received under a gift transaction, such as a gift from a relative as defined under the Income Tax Act, the recipient generally inherits the donor’s cost for capital gains purposes.
Consequently, capital gains on a subsequent sale are ordinarily computed with reference to the cost that would have been available to the donor under the Income-tax Act, rather than the market value prevailing on the date of the gift.
However, the inherited cost is not always the donor’s original purchase price.
“In certain situations, the Act itself prescribes a substituted or deemed cost, such as under the grandfathering formula for specified investments acquired before 1 February 2018 or the fair market value substitution available for certain investments held prior to 1 April 2001,” said Richa Sawhney, Partner, Grant Thornton Bharat.
“In such cases, the recipient generally succeeds to the tax cost recognised under the Act rather than merely the donor’s historical purchase price,” Sawhney further added.
Gifted shares sold: Who gets the holding period benefit?
The recipient is generally permitted to include the donor’s period of ownership while determining whether the shares qualify as a short-term or long-term capital asset, according to Sawhney.
For example, if a father acquires listed shares and holds them for eight months before gifting them to his daughter, and the daughter retains them for a further six months before selling them, the aggregate holding period would generally be fourteen months.
Accordingly, the nature of the capital gain would be determined with reference to the combined period of ownership rather than only the period for which the recipient held the shares.
Gifted shares: What happens to gains made before the gift?
A gift does not ordinarily eliminate the appreciation that accrued during the donor’s ownership.
Where the recipient inherits the donor’s cost, capital gains on a subsequent sale are generally computed with reference to that inherited cost rather than the market value on the date of the gift. Consequently, appreciation that arose prior to the gift may also form part of the capital gains computation when the shares are eventually sold.
“That said, the inherited tax cost may not always be the donor’s original acquisition price. Where the law itself provides a stepped-up or substituted cost, such as under the grandfathering provisions formula for certain investments acquired before 1 February 2018 or the fair market value substitution available for certain older investments, the recipient would generally be entitled to compute capital gains using the cost recognised under the Act,” stated Sawhney.
Taxability on subsequent transfer of the gifted shares
Upon a subsequent transfer of the gifted shares, capital gains shall be computed based on the sale consideration received, reduced by the cost of acquisition inherited from the donor and any eligible transfer-related expenses, according to Jain.
In the case of listed equity shares, gains arising after an aggregate holding period exceeding 12 months is taxable as long-term capital gains at 12.5%, plus applicable surcharge and cess, while gains arising within 12 months are treated as short-term capital gains and taxed in accordance with the applicable provisions.
For unlisted shares, a holding period exceeding 24 months results in long-term capital gains treatment.
Documentation and compliance
Although there is no mandatory requirement to execute a gift deed for transfer of shares, it is advisable to maintain appropriate documentation evidencing the gift transaction.
The recipient should also preserve records relating to the donor’s original acquisition of the shares, including contract notes, broker statements, demat records and other supporting documents, as these may be relevant for substantiating the cost of acquisition and holding period upon a future sale.
Any taxable gift and subsequent capital gains should be appropriately disclosed in the income-tax return.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.
aniltikotekar4sme.com 