What are the Income Tax Implications on Gifting of Shares?
Taxation

What are the Income Tax Implications on Gifting of Shares?

6 Mins read

Using shares as a gift can also be a good form of personal wealth transfer or to assist relatives, or more generally, in estate planning. Nevertheless, awareness regarding the incidence of income tax laws with these kinds of transactions in India is apprehensible. This blog will focus on the following aspects of gifting of share: how it operates, the tax implications for both the giver and the recipient, and measures that need to be taken over this financial decision.

What is Gifting Shares?

This is yet another form of gifting whereby someone gives shares of a particular firm to another person with no compensation being made. This could be for use for personal use, for relatives or friends, or for contribution to charitable institutions. Thus, the concept of gifting is quite clear and unambiguous but when we come to determining tax consequences under Indian tax laws, the appear to be quite cumbersome.

The Basics of Share Gifting

When you give away shares in India, you convey to someone else part ownership in a firm’s stock. The recipient can own the shares and can convey them, transfer or even give them as a gifted item to another person. In this case, the value of the shares is assigned at the time of gifting and this is very important under tax laws.

Some of the implications of giving a gift have been discussed above; however the information provided above only reflects those relating to tax implications for the receiver of the gift and not the giver.

Tax Implications, Specifically the Capital Gains Tax

Another issue that defines the selected instrument from the perspective of the giver is its capacity to generate capital gains tax. In India, it is not necessary to pay capital gains tax when gifting shares or shares. Capital gains tax liability is the responsibility of the recipient who sells the shares, but the liability only occurs on the occasion of the sale of shares. If the shares were given as a gift, the recipient may have capital gains tax to pay on the increase in value of the shares from the time that the giver purchased them to the moment the recipient sells the stock.

 Basis of the Shares

The buyer assumes the cost associated with the share from the side of the giver. For example, if you bought a share costing ₹100 and later gifted it to somebody when the market price of the share was ₹150, the donee’s basis remains ₹100. If they sell the shares for ₹200, it is going to fall within the charge of capital gains tax difference between the selling price ₹200 and the subscribed capital ₹100, hence ₹100.

Gift Tax Considerations

In India the Income Tax Act, 1961 clearly states that gifts are chargeable to tax under certain circumstances. At present, there is no separate gift taxation in India but gifts received if exceed ₹ 50,000 of any financial year income from other sources is required to be taxed. This is why if the value of the shares gifted is over this limit, the recipient must pay tax on the full amount rather than the excess.

Timing and Value of the Gift

Even the timing of the gift can influence the tax structure. Today, several factors can influence the tax implications of the gift. The market value of the share that is being gifted can also affect the situation; for instance, if, at the time of gifting, the market value of the share is high, this will mean that at the next sale, the recipient will be charged a higher tax. On the other hand, you may decide that the value of the shares will fall at some point in the near future and hence it will be wise to gift them in this situation.

Considerations for the Tax Consequences for the Recipient

Receiving Gifting Shares

Where a person receives gifted shares, the person does not pay tax on the amount, assuming the value of the shares does not exceed ₹50000 in a financial year. However, if the gift value is over this amount, the recipient of the gift must declare the whole value in his or her taxable income.

Resident Individual Rate – Holding Period for Capital Gains

At, special impotent to note is the holding period for capital gains tax purposes. This share may also be subject to the holding period of the original owner; nonetheless this burden shall be assumed by the recipient. If the shares were held for over one year the recipient may be able to pay capital gains tax in the long- term rate which has lower percentage than the short-term rates.

Selling the Shares

The latter results in and in case when the recipient decides to sell the gifted shares, he or she should consider the capital gains tax on the appreciation. The tax will be based on the holding period, as well as the percentage of the gain that is to be recovered. The recipient should retain every detail relating to the purchase, purchase price, date of purchase, and any other information that may be useful when computing tax.

Charitable Gifting of Shares

Tax Perspective of Donations to Charity

Giving shares to a charitable organization is very beneficial in terms of tax planning in India. But, when you donate shares to a registered charitable organization, the law allows you to claim under Section 80G of the Income Tax Act the average of the market prices of the shares on the date that is nearest to the date of the gift. This can save you from capital gains tax on the appreciation which is a double plus in my book.

Charitable contributions are another essential aspect of any enterprise financial strategy where one selects, develops, and implements a workable strategy in advance so that during the fiscal year, he/she can automatically make the charitable contribution on schedule at the appropriate time.

Anyone who wants to optimize their donations should be aware of when to give their gifts. It can be more beneficial to bestow shares during bull markets, where values are high, in getting more extensive tax write-offs. Additionally, knowing what is necessary to satisfy the qualifying charity criteria can make your charitable gifting strategy.

Strategies for Gifting Shares

Giving Gifts up to Re. ₹ 50000

For taxation purposes, taxpayers might find it wise to make gifts that do not exceed ₹50000 in a financial year. You can transfer substantial wealth through gifting without attracting tax implications when you spread the gifts both across time and across the beneficiaries.

Utilizing Family Trusts

Gifting shares can be done while preferably through the creation of a family trust. A trust helps you give away the benefit of assets to the chosen family members while retaining legal ownership. This can come in handy in that no or little estate taxes will be required to be paid and again the rightful owners to the property will have been identified.

Special Features to be Include in Recipients

Sometimes it can be valuable to give shares directly to a minor and the taxation of the income is a great consideration to make. Income received for shares held in the name of the minor is taxable in the hands of the parent if such income exceeds ₹ 1,500 in a financial year. Parents should therefore schedule their financial operations well in order to avoid paying more tax than is necessary.

Top Myths About Gift Of Shares In India

Gifting Is Always Tax-Free

A widely held view is that giving shares as a gift attracts no taxes at all. Though the gifting occurrence per se does not necessarily automatically attract taxation, receiving a gift that goes beyond ₹50,000 attracts extreme taxation costs for the recipient.

It is worth noting that only the affluent person can part with such high amounts of cash in what is predominantly a luxury business.

The other wrong assumption that people have is that only the affluent can actually take advantage of gifting practices. In fact, anyone may use gifting as tool within his or her financial planner plan. It is wise to know the rules and boundaries since everyone at different levels of income can convey wealth and help relatives.

All Gifts Are Taxed Equally

Most people have a notion that all gifts are treatment in a similar manner as far as taxation is concerned. However, tax implication is subject varied with value placed on the gift, the recipient and time of the gift.

Conclusion

Blessing shares in India is the solution for wealth transfer, supporting families or charitable organizations, and is a flexible financial instrument. Nevertheless, the identification of income tax implications as significant for both the givers and recipients is all the more important. In responding to the concerns outlined in this paper, one is able to identify the specific taxes, such as the capital gains tax, the ₹50000 gift limit, and gifting techniques that will enable him or her to achieve a specific goal.

It’s, therefore, appropriate to seek professional advice from a tax consultant or any financial planner any time you want to give out share gifts. By doing a little homework, you can make sure that you give gifts that are special but also economically feasible so that your gift can mean more in terms of touched hearts and dollars.

With help of the yearly exclusion, trusts, as well as pragmatic advanced planning, there is a possibility to develop an effective gifting pattern that will meet the certain requirements for both the giver and the recipients. In doing so, you can optimize on your investment and ensure you are part of the solution towards building lasting values out of those investments.

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A Lawyer by profession and a writer by passion, my expertise extends to creating insightful content on topics such as company, GST, accounts payable, and invoice. Expertise in litigation, legal writing, legal research.
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