Answer By law4u team
In India, shares received as gifts from family members are treated differently from gifts received from non-relatives under the Income Tax Act, 1961. The tax treatment primarily focuses on the exemption of gift tax when shares are transferred within the family and the capital gains tax that may apply when those shares are eventually sold. Understanding these provisions helps in assessing any potential tax liability related to the transfer of shares.
Tax Treatment of Shares Received as a Gift from Family:
Exemption from Gift Tax:
Under Section 56(2) of the Income Tax Act, gifts received from relatives (including family members) are exempt from gift tax, regardless of the value of the shares.
Relatives include direct family members such as parents, siblings, spouse, children, grandparents, etc.
Therefore, if you receive shares as a gift from a family member, there is no gift tax applicable on the transfer of those shares, regardless of their market value at the time of transfer.
Capital Gains Tax on Sale of Shares:
While there is no gift tax on shares received from family members, the tax treatment changes when you sell or transfer those shares in the future. Capital gains tax will apply on the sale of these shares, based on the holding period and market value of the shares.
The cost of acquisition of shares for the recipient (the person receiving the gift) is considered as the cost of acquisition for the donor (the person giving the gift).
For example, if a family member gifts you shares of a company that they purchased at Rs. 50 per share, and you later sell those shares at Rs. 100 per share, your capital gains will be calculated as the difference between the selling price and the original purchase price (i.e., Rs. 100 - Rs. 50 = Rs. 50 per share).
Short-Term vs Long-Term Capital Gains:
If the shares are sold within 36 months of receiving the gift, the capital gains will be classified as short-term capital gains (STCG), and will be taxed at a rate of 15% (if the shares are listed on the stock exchange).
If the shares are sold after 36 months, the capital gains will be classified as long-term capital gains (LTCG), and any LTCG exceeding Rs. 1 lakh in a financial year will be subject to tax at 10% (without indexation benefits).
Cost of Acquisition:
The cost of acquisition of the shares for the purpose of calculating capital gains tax is considered as the cost at which the donor acquired the shares.
Additionally, if the shares were received as a gift before 1st February 2018, then the fair market value on 1st February 2018 will be considered as the cost of acquisition for long-term capital gains tax purposes (if applicable).
Dividends on Gifted Shares:
Any dividends received from the shares gifted by a family member are taxable as income in the hands of the recipient.
The dividend income will be subject to tax as per the individual’s applicable income tax slab.
Example:
Example 1: No Gift Tax on Family Transfer
An individual receives 500 shares of a listed company from their father as a gift. The shares are valued at Rs. 2,000 per share.
Since the shares are received from a family member, there is no gift tax applicable on this transfer.
Example 2: Capital Gains on Sale of Gifted Shares
After receiving the gift of 500 shares from their father, the individual sells the shares at Rs. 2,500 per share.
The original cost of acquisition for the father was Rs. 1,500 per share.
The capital gains will be calculated as follows:
- Selling Price: Rs. 2,500 x 500 shares = Rs. 12,50,000
- Cost of Acquisition: Rs. 1,500 x 500 shares = Rs. 7,50,000
- Capital Gain = Rs. 12,50,000 - Rs. 7,50,000 = Rs. 5,00,000
This capital gain is subject to short-term or long-term capital gains tax, depending on the holding period.
Example 3: Capital Gains on Long-Term Shares
If the same shares are sold after more than 36 months, the gain would be considered long-term.
The capital gains exceeding Rs. 1 lakh would be taxed at 10% without indexation.
Conclusion:
Shares received as a gift from family members are exempt from gift tax under Section 56(2) of the Income Tax Act. However, when these shares are sold, capital gains tax will apply, and the amount of tax depends on the holding period (short-term or long-term). The cost of acquisition for the recipient is the same as the donor’s cost of acquisition, and dividends received from gifted shares are also taxable. Understanding these provisions helps in planning the tax implications when transferring or selling gifted shares in the future.
