With the advent of new technology like e-DIS, online off-market transfer of securities has become seamless, paving the way for gifting shares and ETFs effortlessly. Brokers have leveraged this extensively by providing the facility of gifting shares and ETFs on their platforms. They have become the new go-to for birthdays, anniversaries, weddings and more– no end to gifts, is there? Shares and ETFs also make the best gifts. After all, they have the potential to grow and even become the next big thing in the future. Often, a person oblivious to financial markets–upon receiving something as peculiar as shares or ETFs– could finally find that push and foray into the world of investing. Who knows, perhaps these gift-givers could help bring the next million investors into the Indian equity markets.
With all this gifting, let’s discuss the tax implications of gifting equity shares and ETFs in the hands of both receiver and the sender.
Before we start, a primer into the taxation of gifts in India:
Provisions for taxation of gifts are defined under Section 56(2) of the Indian Income Tax Act. Gifts are charged under the head “Income from Other Sources” at tax rates applicable to an individual. As per tax provisions, gift means property (movable or immovable) and money (cash, cheque, etc.) received without consideration or against inadequate consideration. Gifts are taxable in the hand of the receiver if it exceeds more than 50K within a financial year.
However, there are certain situations where the receiver is not liable to pay any tax, irrespective of the monetary value of the gift
1. If the gift is received from a close relative. Close relatives have been defined as:
- Spouse of the individual
- Brother and sister (including their respective spouses) of both individual and their spouse
- Brother and Sister (including their respective spouse) of an individual’s father and mother
- any lineal ascendant or descendant (including their respective spouses) of the individual
- any lineal ascendant or descendant (including their respective spouses) of the spouse of the individual
2. Gifts received on the occasion of marriage
3. Gifts received under a Will or by way of inheritance
4. In contemplation of the death of the payer
5. Gifts received from any local authority (as defined in clause (20) of Section 10)
6. Gifts received from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution (as defined in clause (23C) of Section 10)
7. Gifts received from any trust or institution registered under Section 12AA
Taxation on gifting equity shares & ETFs:
For the sender of the gift
On transfer: The Gift Tax Act (GTA) was abolished in 1988, and thus sender need not pay tax on gifts. Further, shares and ETFs are Capital Assets, and the transfer of a Capital Asset is taxable as Capital Gains. However, according to income tax rules, gifting is not a transfer. Thus, the gift of shares and ETFs are not taxable in the hands of the sender of the gift.
On the sale of shares/ETFs: Since the gifted shares/ETFs are not in the sender’s name, any sale in the open market is not taxable in the sender’s hands.
Note on clubbing provisions: In case the receiver of gifted shares and ETFs are the spouse or a minor child, any income that arises directly or indirectly from such asset will be clubbed with the income of the sender.
For the receiver of the gift
On transfer: Gifts are taxable in the hands of the receiver, as mentioned earlier in the blog. If the fair market value of the gifted shares and ETFs is less than 50K, they will be exempt from tax. On the other hand, the value of gifts exceeding 50K will be fully taxable in the hands of the receiver. However, any shares and ETFs received in any exempt situations mentioned above will be entirely exempt in the hands of the receiver. For instance, if shares were received as a gift on the occasion of marriage or from a relative.
On the sale of shares/ETFs: Capital gains would arise on the sale of gifted shares/ETFs. The receiver of the gift would be liable to pay the capital gain tax applicable. To calculate the capital gain, the receiver would have to consider a few essential points:
- Period of holding: The period from the date of purchase of a capital asset (here shares/ETFs) to the date of its sale is called the period of holding– it is essential to determine whether the shares/ETFs will be taxed as short-term or long-term capital assets. Equity Shares/ETFs held for more than 12 months from the date of purchase are taxed as long-term and short-term if held for less than 12 months. In order to calculate the period of holding of shares/ETFs received as gifts, the receiver will have to count the period of holding from the date of purchase of the shares/ETFs by the previous owner, i.e., the sender of the gift. The date of receiving the gift is immaterial while calculating the holding period.
- Purchase price: Capital gains are calculated after subtracting the sale price of shares/ETFs from their purchase price. In the case of gifts, the price at which the sender of the gifts acquired the shares/ETFs is considered while calculating the capital gains. Hence the value at which the gift receiver got the shares/ETFs is irrelevant, and the cost to the previous owner will be taken as the cost of acquisition of shares/ETFs.
- Taxation: LTCG tax is exempt for the first 1 lakh of capital gains, and a 10% tax is applicable for gains above it. Short-term gains will be taxed at the rate of 15%.
Note on reporting and documentation of gift transactions: The sender of the gift need not report the gift while filing taxes; however, the receiver of the gift should report the gift as exempt income if the gift is exempt or as IFOS if the gift is taxable.
It’s crucial to maintain proper documentation for gift transactions. A registered gift deed as proof of the gift transaction can be maintained by the sender and receiver. This is especially advisable for high-value gift transactions. In cases of scrutiny, the taxpayer can use this document to justify the genuineness of the gift transaction and avoid charges for tax evasion.
Thank you for taking the time to read. Stay tuned for more blogs like these.
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– Nischay Avichal