It is the season of festivals and gifting to our near and dear ones is customary. Gifting is a way to show that you care about someone. Gifts can be in the form of money, immovable property, movable property such as Gold, shares, etc.
Suppose, you want to gift your sister a perfect wedding gift. The gift has to be both special and useful.
The first choice can be Gold as it is a symbol of prosperity.
On the other hand, you can be a little more creative and practical and gift shares, as it is a gift that grows with time.
Some of the advantages of giving Shares as a gift can be :
• Shares offer liquidity. The shareholder can sell the shares and convert them into money whenever needed.
• It also offers a regular income as shareholders receive dividends from blue-chip companies.
• When you gift shares, you do not have to pay tax on the transaction. (Subject you fall in the exempted category)
A share may not gleam like a beautiful gold necklace. But it might just be the asset your loved ones want in their times of need.
This article is focused on the procedure for gifting of listed shares in India and tax implications for the person gifting, i.e., the Donor and the receiver/beneficiary of such gifts i.e. the Donee.
BASICS OF TAXABILITY OF GIFTS
A gift is a sum of money or movable property or immovable property received without consideration or inadequate consideration. Tax on shares gifted is defined under Section 56(2) of the Income Tax Act. In India, gifts can be of 2 categories – (1) Non- Taxable Gifts and (2) Taxable Gifts.
Non- Taxable Gifts are basically those gifts that are not considered as income in the hands of the recipient and have no tax implications in the hands of the Donor, irrespective of the amount of the gift, are as follows:
(A) Gifts from a relative as defined under the income-tax laws to include spouse, brothers/ sisters (and their spouses) of the individual/ individual’s spouse/ individual’s parents, lineal ascendants/ descendants (and their spouses) of the individual/ individual’s spouse.
(B) Gifts on the occasion of the marriage of the individual
(C) Gifts under a will or by inheritance
(D) Gifts in contemplation of death of the donor (i.e., gifts given by a person in anticipation of his/ her death)
Taxable Gifts are those gifts that are not covered in Non-Taxable/Exempt Category of Gifts and aggregate amount or FMV of asset is more than Rs. 50,000. In such cases, the entire amount is taxable under the head ‘Income from Other Sources’.
HOW TO TRANSFER/GIFT THE SHARES
Gifting of equity shares involves the transfer of shares from the donor (one who is gifting) to the donee (the receiver of the gift) without any monetary transaction in return. The transfer of equity shares offered as gifts happens through an off-market transaction, i.e. between depository and depository participants without involving stock exchange. Shares can be gifted only in the Demat form. The process can be undertaken via conventional method or via Electronic mode (at present, allowed by Zerodha only)
(A) Conventional Method: Let us understand the process of transfer of shares for gifting.
Step 1- Donor to submit DIS (delivery instruction slip)
The donor shall be submitting a DIS instruction slip to his Demat account service provider, also known as depository participant (DP). The DIS should contain details of the ISIN code of the shares, DP ID, Client ID, DP name of the donee or receiver. The slip should also contain the instruction regarding the number of shares under transfer and the date on which the share transfer should be executed.
Step 2- Donee to submit receipt instruction
The donee/receiver of the equity shares has to submit an instruction of receipt of the shares to his depository participant (DEMAT account provider) for receiving the shares. Details like DP ID, name, etc. should be mentioned to facilitate the receipt of the shares from the donor’s Demat account.
Step 3- Execution of instructions.
After receipt of DIS or receipt instructions, the details mentioned both the delivery instructions and receipt instructions are tallied which must match. Shares received from the donor will be credited to the receiver’s DP account after the submission of the receipt instruction on the date of execution as mentioned.
Also, it is to be noted that once the transfer is executed, the shares cannot be revoked.
(B) Electronic Method:
Firstly, the donor and donee both should have an account with the Zerodha. The process is quite simple and can be traced from the official website (link enclosed)
https://support.zerodha.com/category/your-zerodha-account/transfer-of-shares-and-conversion-of-shares/articles/gift-shares
TAXABILITY IN THE HANDS OF DONOR
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.
TAXABILITY IN THE HANDS OF DONEE
(A) AT THE TIME OF TRANSFER OF SHARES
a. If from exempted category (i.e. Relative/on the occasion of Marriage/Will/Inheritance) – The gift received is not taxable, irrespective of the value of the shares transferred.
b. If from the Taxable category, but FMV of the shares is less than or equal to Rs. 50,000 – No tax implications.
c. If from the Taxable category and FMV of the shares is more than Rs. 50,000 – The transfer of share is taxable and the value of gift received is now taxable under Other Sources.
(B) AT THE TIME OF SALE OF SHARES
a. Sale of shares received as a gift would be taxable under the head Income from Capital Gains.
b. To determine the nature of Capital Gains whether STCG or LTCG, the holding period would be determined from the date of acquisition by the previous owner (i.e. the donor of the gift) till the date of sale.
c. To compute the Capital Gains, the Cost of Acquisition of the Capital Asset would be determined as the purchase price of the previous owner (i.e. the donor of the gift).
Example
Mr. Aman purchased 500 shares at INR 200 of ABC Ltd on 15th February 2020. He gifted 200 shares to his mother, Shweta on 1st September 2020. FMV on 01st September 2020 was INR 400 per share. Shweta sold out these shares on 2nd March 2021 at INR 800. Calculate the tax liability.
Tax treatment for Aman (Donor) – No tax liability since the gift of shares is not treated as a transfer of capital asset.
Tax treatment for Shweta (Donee)
• 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 the sale of shares. Here is the tax calculation:
o Sale Date – 02/03/2021
o Sale Value – INR 1,60,000 (800 * 200 Sh.)
o Purchase Date – 15/02/2020 (as per previous owner)
o Purchase Value – INR 40,000 (200 * 200 Sh.) (as per previous owner)
o LTCG = 1,60,000 – 40,000 = INR 1,20,000
o Tax on LTCG u/s 112A = INR 2,000
[10* (1,20,000-1,00,000 (exemption)]
Frequent Asked Questions (FAQ’s)
1. Execution of Gift Deed – Shares are considered as “movable property”, as they can be easily transferred through Demat. As for movable property, it is not necessary to execute a gift deed. However, to create a legal record and for convenience for future proceedings if any, it is advisable to execute a gift deed on an appropriate stamp paper.
2. Clubbing of Income in the hands of the donor –
a. In case of income arising from shares gifted to a spouse or minor child, provisions of clubbing of income shall apply. Hence, any income like dividend received by the spouse/minor child on the gifted shares will be clubbed along with other income of the donor.
b. However, in the case of an adult child, the same stands taxable in the hands of the donee and not the donor.
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Disclaimer: The above article has been compiled for educational purposes only. For any financial planning including tax planning and business consultancy, the author can be reached at camridulgupta0709@gmail.com.
Author Bio
Anyone can open a demat account in Zerodha by using following referral link:
https://zerodha.com/open-account?c=XH3728