Transfers of shares without consideration are widespread in business and family practice. Shares are usually given up as gifts, family settlements, succession planning or restructuring within the company. People tend to assume that there is no exchange of money, so such transfers are entirely tax-free. But according to the Indian Income Tax Act, share transfer without consideration is not necessarily tax-free. The tax treatment is based on the character of transfer, the relationship between parties, as well as on particular provisions of the Income-tax Act, 1961. The transferor and transferee might have tax implications in various terms.
Meaning of Share Transfer without Consideration
A share transfer without consideration is a type of transfer of shares in which a person transfers ownership of shares to another without being compensated with any monetary or non-monetary item. These are commonly done through gifts, family planning, inheritance planning, or even the reorganisation of an in-group. Although consideration is not expressly stated, the law considers whether the transfer is real and whether it is subject to capital gains tax or gift tax.
Tax Implications in the Hands of the Transferor
a) The Applicability of the Capital Gains Tax is
According to Section 45 of the Income Tax Act, capital gains tax is imposed on the transfer of a capital asset. Shares are considered capital assets, and the transfer would, in most cases, be subject to capital gains tax. But capital gains computation involves consideration, which does not exist in the case of a gift.
b) Exemption under Section 47
Section 47(iii) states that the transfer of a capital asset by way of gift is not considered a transfer of a capital asset in the purview of capital gains. Thus, capital gains tax is not payable in the hands of the transferor in a case where shares are transferred as a true gift. The exemption is independent of the value of shares and the holding period.
c) Importance of Genuineness
The exemption is only available in case it is a true gift transfer. A gift deed, board approval and proper accounting treatment must be properly documented. The exemption could be refused in the event that the transaction has been determined as a disguised sale or colourable device.
Tax Implications in the Hands of the Transferee
a) Applicability of Section 56(2)(x)
The transferor might not be subject to taxation, but the recipient of the shares might be subject to taxation under Section 56(2)(x). This part imposes tax on receiving property without consideration in case the fair market value exceeds Rs. 50,000. The shares are singly mentioned in the definition of property.
b) Taxability as Other Sources of Income
In case the shares are acquired without money and there is no exemption, the fair market value of the shares is taxable in the hands of the transferee under the head “Income from Other Sources. This is both on quoted and unquoted shares.
c) Threshold Limit
Section 56(2)(x) tax is only imposed on the aggregate fair market value of shares obtained without consideration in the case where the aggregate exceeds Rs. 50,000 in the financial year.
Exemption Under Section 56(2)(x)
a) Receipt from Relatives
Among the exemptions, one of the most significant is receiving shares of a relative. Younger In the situation of individuals, relatives are spouse, parents, children, siblings, lineal descendants or ascendants, and some other close family members. The shares received by such relatives are not subject to any tax.
b) Inheritance and Will
The shares bequeathed under a will or by means of an inheritance are not subject to tax, whether of a high or a low value. Such an exemption is especially applicable in the context of succession planning.
c) Other Specified Exemptions
The shares obtained under contemplation of death or certain trusts are also exempt from tax under Section 56(2) (x), though there are conditions provided in the law.
Valuation of Shares for Tax Purposes
a) Rule 11UA for Valuation
In the case of the application of Section 56( 2)(x), the fair market value of shares should be found under the Rule 11 UA of the Income-tax Rules, 1962. It is important that the value be properly valued because taxes are imposed on the value calculated in accordance with these rules.
b) Quoted Shares
In the case of quoted shares, fair market value is taken to be the market value of such shares on the date of receipt on the recognised stock exchange.
c) Unquoted Shares
In unquoted equity shares, valuation is done by using the net asset value technique or any other formula provided. Wrong valuation will result in interviews, extensions, and fines.
Clubbing Provisions and Future Income
a) Applicability of Section 64
Although the transfer of shares without consideration may be tax-free at the point of transfer, the clubbing provisions may be applied to income earned in future on such shares. In case shares have been gifted to a minor child, the income on such shares will be aggregated with the income of the parent.
b) No Clubbing in Other Cases
Clubbing is not usually applicable where the shares are transferred to large children or other family members, and the income collected is taxed in the hands of the beneficiary.
Real-world Risks and Compliance Issues
a) Taxes Authorities Accountability
To prevent tax avoidance, share transfers without consideration are carefully scrutinised by tax authorities. The fact that the transfer is large, undocumented, a familial relationship is absent, or the transaction is repeated can raise some eyebrows.
b) Corporate Law Compliance
Along with tax compliance, corporate law, including board approval, issuance of share transfer forms, updating the register of members, and statutory filings, must be adhered to. Failure to comply can dilute the tax stand.
c) Substance over Form
It is not enough to label a transaction a gift. Law enforcers will examine the true motive, the facts on the ground, and the profit made in the deal.
Conclusion
The Income-tax Act provides for the transfer of property without consideration and sets out several issues to determine whether it is taxable. Although it does not attract capital gains tax on a genuine gift of shares in the hands of the transferor, the transferee is subject to tax under section 56(2)(x) unless he has an exemption. The issue of valuation rules, clubbing and correct documentation are crucial in deciding on the results of tax. Thus, the types of share transfers without consideration should be well-designed, legally recorded, and professionally audited to be economically efficient in terms of taxes and to prevent future controversies.
