How Gifts of Equity Shares Affect Taxation for Donors and Recipients
In India, the tax treatment of gifts of movable property, such as equity shares or other assets, is subject to certain provisions under the Income Tax Act. If an individual receives movable property worth less than ₹50,000 from another person without any consideration, it is typically treated as ‘income from other sources’ and taxed accordingly. However, there are specific exceptions, most notably when the gifts of equity shares is received from a “specified relative.”
Learn about the tax implications when gifting equity shares or movable property in India. Understand how gifts from relatives or non-relatives are taxed.
Understanding Gifts and Tax Implications
The transfer of capital assets as gifts does not trigger capital gains tax for the donor under the tax provisions. When a person receives a gift of movable property, if the value of the asset is under ₹50,000, it is considered t axable in the recipient’s hands as income, but this rule does not apply when the property is received from a specified relative. A “specified relative” includes immediate family members such as parents, siblings, or spouses.
Let’s explore some examples to better understand the tax implications:
Rajesh gifting equity shares to Swathi When Rajesh gifts equity shares to Swathi, the transaction is not considered a “transfer” and does not attract capital gains tax for Rajesh. This means that Rajesh is not liable for any tax on the transfer of shares. As for Swathi, since she receives the gift from a specified relative (the brother of her spouse), the gift is not taxable in her hands at the time of receipt. However, if Swathi later sells the shares, she will be subject to capital gains tax. In such a case, the cost of acquisition of the shares for capital gains calculation purposes will be the same as Rajesh’s original cost of acquisition.
Rajesh lending shares to Swathi In a scenario where Rajesh lends equity shares to Swathi by transferring them to her demat account temporarily, the tax treatment differs from gifting. Lending an asset typically does not constitute a “transfer” under tax laws because the ownership remains with the original holder (Rajesh in this case). Even if the transaction is viewed as a gift, since it is between specified relatives, it may not be treated as a taxable gift. The details of the transaction, including the terms and conditions of the loan agreement, need to be examined to understand its exact tax implications.
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Rajesh gifting equity shares to Nandha If Rajesh gifts equity shares to Nandha (who is a friend and not a specified relative), the tax treatment changes. Although gifting the shares does not trigger capital gains tax for Rajesh, the receipt of shares by Nandha will be taxable if the fair market value (FMV) of the shares exceeds ₹50,000. In this case, the value of the gift will be taxed as “income from other sources” at the applicable income tax slab rate. If Nandha decides to sell these shares later, he will be subject to capital gains tax. His cost of acquisition for calculating the capital gains will be deemed to be the FMV of the shares at the time of receipt.
In summary, while the transfer of capital assets as a gift does not incur capital gains tax, there are specific conditions under which the recipient may be liable to pay taxes, especially when the value of the gift exceeds ₹50,000. Gifts from specified relatives are generally exempt from this taxation, but when assets are received from non-relatives, tax is levied based on the fair market value. Moreover, when the recipient sells the gifted asset, they will incur capital gains tax, calculated based on the cost of acquisition.
As always, individuals engaging in these transactions should be aware of the potential tax implications and, where necessary, consult with a financial or tax expert to ensure compliance with the Income Tax Act.
Disclaimer: This is not financial or investment advice. Please conduct your own due diligence or seek expert guidance for financial planning.
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