I’ve come across many queries in the forum about gifting of shares and whether or not clubbing provisions apply in those cases.
Well, gifting of shares and securities has become very common these days and in many cases, people do so to divert some of their income within their families and hence, pay lower taxes.
But, this may not be the ideal case because of the clubbing provisions. This is because, the income from these gifted shares, be it any dividends or capital gains is clubbed into the hands of the sender of the gift. This means that the sender is liable to pay taxes on that income.
When is clubbing applicable?
While you can gift shares to anyone and everyone you’d like to, clubbing is specifically applicable when shares are gifted to,
- Spouse
- Minor Child
- Daughter-in-law
- HUF
Here are some key points to consider:
- In case of shares gifted to your spouse or daughter-in-law, the income from these shares will be clubbed in your hands, i.e. the transferor/sender of the gift.
- When shares are gifted to a minor child, any income arising from these shares will be clubbed with the income of the higher-earning parent and they will have to bear the entire tax liability on the same. However, if such shares are sold after the child turns major, clubbing provisions will not apply.
- For HUFs, the income would be clubbed in the hands of the member transferring the shares.
How are capital gains on gifted shares calculated?
When calculating capital gains on gifted shares, the holding period and acquisition cost are based on the previous owner’s records.
For example, if you give shares to your spouse and they later sell them, the original purchase date and cost when you bought the shares will determine the holding period and capital gains. Based on this, the tax liability is calculated.
Does clubbing apply to losses as well?
So, clubbing is applicable on the income generated from gifted shares and the term ‘income’ here includes both profits and losses. Hence, if the gifted shares are sold at a loss, the sender of the gift can claim these losses.
The clubbing provisions will not apply to the income derived from the clubbed income. For example, if the profits from shares are reinvested in an FD, the interest income from the FD will not be clubbed.