If a father transfers shares of a company to his daughter or son, are they liable to pay taxes? Several factors will determine the tax liability, including the genuineness of the transaction, the presence of a gift deed, the holding period of the shares, and more.
Under Section 56 of the Income Tax Act, any monetary gift, immovable property, or movable property received by an individual is subject to taxation if the total amount received during the year exceeds Rs 50,000. Nonetheless, certain exceptions to this regulation exist, notably gifts received from relatives.
Section 47 exempts capital gains on gifting of shares, even though it falls under the definition of “transfer”. However, if the recipient of the shares falls under the definition of relative as per Section 56, then there is no tax due in the hands of the receiver. Further, for computing taxes on subsequent share sales by the receiver, the cost will be borne by the previous owner and the holding period will also start from the date when the previous owner acquired the shares. The above is applicable even if the shares are transferred as part of inheritance.
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Chintak Shah, Vice President, Anand Rathi Wealth Limited, explains the taxation rules in case of gifting of shares.
“If shares received as a gift are immediately sold after receiving, the resulting income is taxable under the head ‘Income from Capital Gains.’ The recipient should pay tax at applicable rates and file ITR-2,” he explains.
How is capital gain calculated on gifted shares?
The holding period for determining the nature of capital gains, whether short-term or long-term, is calculated from the date of acquisition by the previous owner until the date of sale. The capital asset’s acquisition cost is determined as the previous owner’s purchase price to compute the capital gains.
To authenticate the genuineness of the gift transaction, it’s essential to maintain proper documentation, such as a gift deed, by both the sender and recipient. High-value gifts may undergo scrutiny by the tax department, highlighting the importance of thorough documentation.
Tax on transfer of shares
Section 2(47) of the Income Tax Act, 1961 defines “transfer”, which amongst other things includes sale, exchange, or relinquishment of an asset. Once an asset is transferred, “Capital Gains” is due. Shares can be either listed or unlisted.
Taxation on sale of listed shares
Gains on listed shares are categorized as long-term if they are sold after a holding period of 1 year, otherwise they are considered as short-term, says Shah. “Long-term capital gains on sale of listed shares on a recognized stock exchange will attract a tax rate of 10% along with an education cess and surcharge, if applicable, whereas short-term capital gains are taxed at 15%.”
However, long-term capital gains come with an exemption of Rs 1,00,000 per year i.e. gains exceeding Rs 1 lakh will only be taxable, he adds.
Further, if the shares were acquired prior to 31.01.2018 – then cost for income tax purposes will be higher of the actual purchase price or price as on 31st January 2018.
Taxation on sale of unlisted shares
Gains on listed shares are categorized as long-term if they are sold after a holding period of 2 years, otherwise they are considered as short-term. Long-term capital gains on the sale of unlisted shares will attract a tax rate of 20% after indexation, along with education cess and surcharge, if applicable, whereas short-term capital gains are taxed as per slab rates.
