FEMA

Tax implications on Gifting Shares

The transfer is a process whereby one person delivers to another any property. The delivery of property according to Income Tax Act, 1961^[1] will attract tax liability. Section 2(47) defines transfer as sale, relinquishment, extinguishment, conversion into stock-in-trade, compulsory acquisition, or extinguishment of any right.

A gift is considered as delivery of movable property (Listed & Unlisted shares) and immovable property from one person to another without consideration. An individual is entitled to transfer his share to another person subject to following due process of law. This article will discuss in detail the tax implications of gifting shares.

Gift According to Income Tax Act, 1961

According to the Income Tax act, 1961

¹

a Gift means any immovable and movable property received without consideration and against inadequate consideration. The meaning of movable ad immovable property can be understood as:

• Immovable Property: According to Section 2(26) of the General Clauses Act, 1897, any immovable property will include land, any benefits arising from that land, and anything attached to the earth. For instance, land building or both.
• Movable Property: According to Section 2(36) of the General clause acct, 1897, a movable property includes property of any kind, except Immovable property. For instance, shares, jewelleries, drawings, sculptures, paintings, archaeological Collections and bullion.

Tax on gifting shares according to Income Tax Act, 1961

The shares and securities are considered movable property. Section-56 of the Income Tax Act, 1961, discusses income from other sources. The transfer of shares takes place from two sides (i.e. Sender and the receiver); therefore, the tax implication shall be understood from both sides.

Tax Implication on behalf of the transferor

According to Section 2(14) of the IT Act 1961, shares are a capital asset. Any gain earned on the transfer of shares shall be regarded as capital gain; hence, any capital gain shall be liable for taxation. But according to Section 47, certain transactions are excluded from transfer. A gift is one of the elements that is excluded from the definition of transfer. Therefore, the tax will not be deducted from the transferor’s hands on the transfer of shares.

However, gifting shares is a capital gain on account of the transferee, and he is not excluded from taxation, provided that the amount of share transferred is more than the specified amount. The tax implication from the side of the transferee is discussed below.

Tax Implication on behalf of the transferee

According to Section 56, gifting shares on account for share transmission are liable for exemption if:

The amount of shares received is less than Rs 50,000	Whole amount is exempted
The amount of shares received is more than Rs 50,000	Not Exempted

The amount on which tax is to be calculated is enumerated below:

If the amount received without any consideration exceeds Rs 50,000	The aggregate value of the shares transferred
If the amount received, including inadequate consideration, exceeds Rs 50,000	The fair market value of the shares transferred

Shares received from relatives

Gifting shares or receiving shares in Gift from/to a relative is exempted from the tax. Section 56(2) (vii) provides that any shares or securities received from a relative are liable to be exempted from the tax. According to the act, the word “Relative” includes:

1. Spouse of the person
2. Brother/Sister of the person
3. Brother/Sister of the spouse of the person
4. Brother/ Sister of either of the parent of the person
5. Any lineal ascendant/Descendant of the person
6. Any lineal ascendant/Descendant of the spouse of the person
7. Spouse of the individual mentioned in points (2) to (6)

Shares received on other occasions.

Any shares received on account of the below-mentioned occasions are liable to be exempted from tax:

1. Occasion of Marriage
2. Will
3. Inheritance
4. Contemplation on the death of the transferor
5. Local authority, fund, university etc.

Valuation of Shares

The valuation of the share, when received by a non-relative, will be:

Nature of Shares	Valuation
Shares (where the transaction takes place through a recognised stock exchange)	The amount recorded on Stock Exchange
Shares ( where transaction of shares does not take place through Recognised Stock Exchange)	The lowest price paid for such shares on any recognised stock exchange in India.
Unlisted share	The market value of the share ( it shall be the price that it would receive if sold on the date of valuation)

Process for Gifting Shares

 The process for transfer of shares (assuming the shares are in DEMAT form) includes:

1. The transferor has to file a Delivery instruction slip (DIS) and has to submit it to the DP (Depository Participant)
2. The DIS should contain the no. of shares to be transferred and Depository Participant ID, DP name, and transferee ID. The date of execution shall be mentioned in the instruction slip.
3. The transferee has to file a receipt instruction (RI) and needs to submit it with his DP. The Transferee DP will credit the shares from the transferor DP on the receipt of the receipt instruction.
4. Once the DP receives the DIS and RI, both parties will be issued copies. The shares will be transferred on the date of execution.

Conclusion

The transfer of shares is considered movable property, and gifting shares are exempted from tax, but there are some occasions where the value of the amount transferred is taxable. From the above article, we can analyse that gifting shares to a non-relative are taxable. If the amount of securities transferred exceeds the value of Rs 50,000, then the whole amount exceeding Rs 50,000 is liable for taxation. Hence, any amount of shares given above Rs 50,000 is liable for exemption if the transferee is a relative of the transferor.

FAQ

Read our Article: Gift of Shares from Resident to NRI

1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx