Gifting is considered a thoughtful way to convey one’s best wishes and greetings on a special occasion. The gifting culture in India has been there for ages and now has been handed down to us as well. Not much has changed in today’s era. Gifting is a gesture that creates bonds and fosters love and care among people.
With time, gifting trends have also evolved. In this digital era of the stock market and the rising number of traders and investors, it is possible to gift shares and securities to your loved ones. It is a good option for gifting as it is something that has growth potential and can also be encashed anytime.
Though gifts received are free of cost, there could be a tax implication to the receiver.
Let’s understand the taxation aspect of gifting shares.
Firstly, what is a “gift”?
In simple words, gifting means transferring money, property- movable or immovable without or inadequate consideration usually out of love and affection.
How can we gift shares?
Majority of the trading platforms nowadays allow gifting shares online using the e-DIS (Delivery Instruction Slip) facility. So, no physical document submission is required*.*
When there is an income generated from the gift received, it is taxable in the hands of the receiver. The taxability of gifts is determined by two factors: the relationship between the persons and the value of the gift.
- If the receiver of the gift is a “relative” as per the Income Tax Act, it is not taxable in the hands of the receiver, irrespective of the value.
- If a gift above ₹50,000 is made to a person other than a relative, then it is taxable in the hands of the receiver.
- The receiver of the gift should report the gift in his ITR under Schedule Exempt Income if the income is exempt or Schedule OS (IFOS) if the income is taxable.
Who is a relative as per the Income Tax Act?
The following persons are regarded as relatives as per the IT Act:
- Spouse of the individual
- Brother or sister of the individual
- Brother or sister of the spouse of the individual
- Brother or sister of either of the parents of the individual
- Any lineal ascendant or descendant of the individual
- Any lineal ascendant or descendant of the spouse of the individual
Note: Gift received on the occasion of marriage, death & inheritance is not charged to tax.
What does it mean?
For the sender of the gift, there is no tax implication. However, there could be a case of clubbing of income.
For the receiver of the gift, there could be different instances such as:
- If the monetary value of the shares exceeds ₹50,000, such a gift is taxable under section 56(2)(x) of the Income tax act, under IFOS at a slab rate.
- If the securities are received as a gift from a relative, it is exempt irrespective of their value. When these shares are sold, then the amount on which tax is already paid shall be the cost of acquisition and profit shall be taxed under Income from Capital Gains in the hands of the receiver. The tax liability depends on factors such as the period of holding of the previous owner, purchase & sales value, and purchase & sale date.
How is this tax calculated? Read about it at Tax on Gifted Shares & Securities - Learn by Quicko
Let’s understand with some examples.
Example 1: Ram received the following gifts on his birthday in the financial year 2022-23.
- ₹25,000 from a friend
- ₹51,000 from his elder brother
- ₹35,000 from his father’s friend
What will be the tax implications?
Answer: In this case, the occasion is a birthday, which is not covered in the tax exemption list.
So, only ₹51,000 shall be exempt as it was received from a relative as per the IT Act. The amount received from a friend and uncle (Ram’s father’s friend) will be taxable fully, it (₹60,000) exceeds the limit of ₹50,000. This shall be taxed at a slab under “Income from Other Sources”.
Muskan received shares from her father as a gift for her birthday on 17 Feb 2023. The FMV of these shares is ₹2,00,000. Her father had purchased them for ₹70,000 7 years ago. She decides to sell these shares and have some liquid funds in hand. She also received some jewelry worth ₹80,000 as a gift from her mother for starting a new business. What are the tax implications?
Answer: In this case, the FMV of the shares is ₹2,00,000 and was purchased for ₹70,000. Thus, the excess amount, ie, ₹1,40,000 will be chargeable to tax under the head Income from Capital Gains.
Since the shares are held for more than 12 months from the date of purchase by the previous owner (ie, father), it is considered as Long Term.
So, the difference (₹1,40,000 - ₹1,00,000 = ₹40,000) gain will be taxed as LTCG at a flat rate of 10% after considering the exemption limit of ₹1,00,000 u/s 112A.
The jewelry received as a gift will be exempted as it is received from a relative under the IT Act.
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