A gift is a sum of money or movable property or immovable property received without consideration or inadequate consideration. Tax on gifted shares is defined under Section 56(2) of the Income Tax Act.
A gift of monetary value exceeding INR 50,000 is taxable as Income from Other Sources (IFOS) at slab rates. The gift received from a relative, or on the occasion of marriage, as inheritance or in contemplation of death is exempt from tax.
Shares and securities are considered as movable property. Trading plaforms like Zerodha have built a platform to gift stocks, mutual funds and bonds after introduction of e-DIS (electronic delivery instruction slip) by CDSL. Thus, it is now possible to gift stocks and securities to friends and relatives online.
Tax on gifted shares for sender
On transfer of shares & securities:
The Gift Tax Act (GTA) was abolished in 1988 and thus sender need not pay tax on gifts.
As per Section 2(14) of the Income Tax Act, shares and securities is a Capital Asset. The transfer of a Capital Asset is taxable as Capital Gains. However, the definition of ‘transfer’ as per Section 47 specifically excludes gift. Thus, the gift of shares and securities is not taxable in the hands of the sender of the gift.
On sale of shares & securities:
Sale of shares & securities is not taxable in the hands of the sender of gift.
Rajiv purchased 2000 shares at INR 100 of ABC Ltd on 15th February 2020. He gifted 1000 shares to his wife, Shweta on 1st September 2020. FMV on 01/09/2020 was INR 200 per share. Shweta sold out these shares on 2nd March 2021 at INR 400. Calculate the tax liability.
Tax treatment for Rajiv (sender) – No tax liability since the gift of shares is not treated as a transfer of capital asset.
Tax treatment for Shweta (receiver)
On receiving a gift – no tax liability since gift from a relative is an exempt income as per Section 56(2)(vii) of Income Tax Act.
On sale of shares – treated as Capital Gains. Here is the tax calculation:
Sale Date – 02/03/2021
Sale Value – INR 4,00,000 (400 * 1000)
Purchase Date – 15/02/2020 (as per previous owner)
Purchase Value – INR 1,00,000 (100 * 1000) (as per previous owner)
Long Term Capital Gains – 4,00,000 – 1,00,000 = INR 3,00,000
The sender of the gift need not report the gift in the Income Tax Return. The receiver of the gift should report the gift under Schedule Exempt Income if the income is exempt or Schedule OS (IFOS) 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.
It is very important to maintain proper documentation for gift transactions. It is advisable for the sender and receiver to maintain a registered a gift deed as a proof of the gift transaction. In cases of scrutiny, this document can be used to justify the genuineness of the gift transaction and avoid charges for tax evasion.
I have 1 lac shares. If I gift 50% shares to my brother, can we both claim LTCG exemption of INR 1 lac on sale of such shares?
If you gift equity shares, it is not considered as the transfer of a capital asset, and thus income tax is not applicable. Gift from a relative is exempt and thus it would be exempt for your brother. When your brother will sell the shares, capital gains would arise. You can both claim benefit of LTCG exemption of up to INR 1 lakh u/s 112A. However, to determine nature of capital gain, the holding period & cost of acquisition is calculated as per the previous owner (sender).
I want to gift shares to my friend, is it taxable?
If the monetary value of the gift is up to INR 50,000, it is not 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 IFOS 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.
Can I save taxes by gifting shares to my wife?
Gift of shares and securities to a relative is not taxable in hands of the sender of the gift and exempt in hands of the receiver of the gift. If you gift shares to your wife, there would be no tax liability on the gift transaction. Further, if your wife sells the shares, Capital Gains would arise and tax should be paid at applicable rates. On gifting of shares, the income would get divided and both can enjoy exemption limits. Thus, taxes would be saved.