Is clubbing applicable on gifted shares?

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.

:bulb: 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.

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My query after clubbing of income in sender’s hands whether the person who receives shares should file ITR pls confirm. The receivers income is zero. pls confirm

@Surbhi_Pal My question is "clubbing of income provision comes under the “transfer of assets” and as “gifts” are not considered as “transfer”. Then how clubbing will be applicable?

Dear sir/Mam, I have transferred shares to my wife demat account now while filling ITR i have added STCG & LTCG in here demat account to MY ITR and shown clubbing of income and paid tax.Now my doubt is whether i should file ITR for her PAN or not even though here income is zero (since i have shown it in my ITR).pls confirm.I heard gift received from husband in the form of shares is not taxable since relative and i have paid tax by clubbing her income in my ITR i dont think it is required to file ITR for her PAN no. pls confirm thanks in advance.

Hey @Deeban_Thangavelu,

If you have transferred the shares without consideration, they will be considered a gift. While gifts from relatives are exempted from taxes, your wife will have to report the FMV value of shares as exempt income and file the ITR.

Hope this helps!

ITR 1 to be filed or ITR 2? pls confrim thanks

Hi,

The gifts will be reported as ‘income from other sources’ and you can file ITR -1 for the same.

@Surbhi_Pal can you please reply to question I mentioned earlier, I am posting it again for reference [My question is "clubbing of income provision comes under the “transfer of assets” and as “gifts” are not considered as “transfer”. Then how clubbing will be applicable?]

Hi

Say I am transferring 10 lakhs worth shares/ETFs to my wife this week. She receives them and sell it next week or month, so it is Short-Term Capital Gain/Loss as the case may be. Clubbing of income applies and I take entire loss/profit in my ITR. Suppose, she sells it for 10.2 lakh, 20000 is my profit and if she sells it for 9.8 lakh, 20000 is my loss. Now, say she sells it for 9.8 lakhs and I report a loss of 20k in my ITR. Now, what happens to this 9.8 lakh available with her. Does this money now entirely belong to her. If she buys shares/ETFs for 9.8 lakh again or does trading with F&O and incurs profit/loss, does clubbing of income again apply to me? how many times does this clubbing of income cycle go on? or is it now full taxation in her hands after this one clubbing cycle?

Hey @Patty,

Yes, as per the scenario mentioned, clubbing of income will be applicable when such gifted shares are sold. However, when the profits are reinvested, clubbing of income is not applicable and your wife will be liable to pay taxes on the same.

Hope this helps!

Thanks for the reply.

I have a doubt. You have said, when the profits are reinvested, clubbing of income is not applicable. Now, my wife has the 9.8 Lakh Capital I have provided to her. The first Loss/Profit, I have clubbed into my income. Now, what if she reinvests this entire principal again 9.8 Lakhs (not just the profit) and makes gain. Now again does clubbing of income applicable? or I am relieved with only one time clubbing of income?

Thanks

I would like to know the answer of the same as well.

Hi [Surbhi_Pal]

Could you please reply to this question… It will help many in a big way

Hello @Patty,

Apologies for missing out on your query.

Clubbing will be applicable only once. This means that any income generated by reinvesting the gains will not be clubbed and the person earning the income will be liable to pay taxes on the same. In your case, your wife will be liable to pay the taxes.

Hi [Surbhi_Pal] Thanks a lot for your reply

Just to be more clearer, after one-time clubbing, the remaining Rs 9.8 lakhs now with my wife becomes her money, am I right? She is now fully responsible for whatever she does with this money tax-wise. Please correct me if I am wrong

Hey,

Yes, your understanding is correct.

Thanks a lot for your time

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Dear sir/Mam,
I would like to gift shares to my wife which is worth more than 50000rs. Assume She will never sell those share, now if she receives dividend against these share transferred whether she is liable to pay tax or I am liable to pay tax pls confirm.
Thank you
Deeban

Hey @Deeban_Thangavelu,

In this case, as the income is arising directly from the gifted shares, clubbing provisions will be applicable and hence, you’ll have to pay taxes on such dividend income.

Moreover, if this income is reinvested, any income then arising will not be subject to clubbing and your wife will be liable to pay the taxes on it.

Mam, You mean to say if I sell at bought price example and re invest it again in her name there won’t be any LTCG or STCG for this sell and then if Dividend is received thereafter it is taxable to her right? pls confirm