While the term ‘gift’ is commonly understood as a ‘present’ given to someone, it also carries a specific legal meaning. Under Indian law, individuals are allowed to gift money, movable property, or immovable property to another person. This means purchased from the stock market can also be legally transferred as a gift. However, such gifts are governed by income tax rules, and shares are no exception.
What are the tax implications for the person giving the gift?
Previously, the person making the gift was liable to pay tax under the provisions of the Gift Tax Act. However, after the abolition of the Act, no gift tax is payable by the sender.
The Income Tax Act also provides that arise when a capital asset is transferred. However, Section 47 of the Act specifically excludes gifts from the definition of ‘transfer’. Therefore, under the Income Tax Act as well, the individual giving the gift is exempt from paying tax.
What are the tax implications for the recipient of the gift?
Assets such as shares, Exchange-Traded Funds (ETFs), mutual funds, jewellery and similar instruments are classified as movable property. According to Indian tax laws, if such assets are gifted without consideration and their Fair Market Value exceeds ₹50,000, the recipient is required to pay tax under Section 56(2) of the Income Tax Act. The value of the gift is treated as income and must be disclosed under ‘Income from Other Sources’ while filing Income Tax Returns. Tax is then levied according to the applicable income tax slab.
However, gifts received in the following situations are exempt from tax even for the recipient:
• If a gift is received from a relative, including spouse, siblings, or lineal ascendants and descendants.
• If the gift is received on the occasion of marriage.
• If the gift is acquired through inheritance.
What are the tax implications when a gifted asset is sold?
• Tax on Sale: If gifted assets such as shares, ETFs, or mutual funds are sold, the gains are taxed under the head ‘Capital Gains’. The taxpayer is required to file ITR-2 and pay the applicable taxes.
• Type of Capital Gains: It is important to determine whether the gains qualify as Long-Term or Short-Term Capital Gains based on the holding period.
• Holding Period Calculation: The holding period is counted from the date the previous owner originally acquired the asset until the date it is sold.
• Cost of Acquisition: For capital gains calculation, the purchase cost incurred by the previous owner is considered as the cost of acquisition.
• Documentation Requirement: Taxpayers should maintain a gift deed or similar supporting documents to establish the legitimacy of the gifting transaction and avoid possible scrutiny from the Income Tax Department.
Understanding Capital Gains Tax
Capital Gains Tax is a levy imposed on the profits an individual earns from selling or transferring their capital assets. Under the Income Tax Act, 1961, these investments include assets like real estate, equity stocks, mutual funds, and gold. The profits realized from such transfers are legally taxable in the specific financial year the transaction occurs.
Types of Capital Gains: The taxation structure categorizes these profits into two distinct types based entirely on the asset’s holding period:
Long-Term Capital Gains (LTCG): If an asset is held past its specified threshold, the profits are treated as long-term gains. For listed equity shares and equity-oriented mutual funds, the long-term classification applies after a holding period of 12 months. For unlisted shares, immovable properties, or gold, the required timeframe is more than 24 months.
Short-Term Capital Gains (STCG): When assets are sold before these timelines finish—meaning 12 months or less for listed equities and 24 months or less for other properties—the profits are classified as short-term gains.