No tax on shares received as gift but sale proceedings taxable
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I want to gift my wife some shares. Will either of us have to pay income tax? If my wife sells these shares, how will the profit be taxed?
As per section 56 of the Income-tax Act, 1961, there will be no tax implications in your wife’s hand on account of her receiving the gift in the form of shares from you. However, since the shares are funded by you, if your wife subsequently proposes to sell the gifted shares, clubbing provisions will have to be applied. Accordingly, the income arising from the sale of the gifted shares will be taxable in your hands and will have to be included in your total income. If the shares are foreign company shares, the dividend if any, arising from there will also be taxed in your hands.
The tax implications on subsequent sale of shares by your wife would depend upon factors such as period of holding, whether securities transaction tax (STT) is paid, whether shares are listed, and others. If the aforesaid listed shares (we assume they are listed in India) are held for over 12 months from acquisition date, the gains from sale will be classified as long-term capital gains (LTCG).
In case of gift, the period of holding of shares shall be reckoned from the acquisition date of shares by the owner who has actually acquired the shares otherwise than by inheritance or gift. Accordingly, the date when you purchased the shares would be considered as acquisition date and period of holding will have to be computed.
If you are liable to pay STT at the time of sale of shares on a recognised stock exchange, then the LTCG shall be exempt from tax. The exempted LTCG should be disclosed in your income-tax return to be compliant from a reporting perspective. If you are not liable to pay STT, say, if the shares are sold off-market, then LTCG should be taxed at 20.6% (inclusive of education cess).
The LTCG should be computed as the difference between net sales proceeds (after deducting the incidental transfer charges) and indexed cost of acquisition. The indexed cost of acquisition will have to be calculated using the applicable cost inflation index notified by the income-tax authorities for the year of acquisition and sale of shares. The cost shall be the price at which you purchased the shares.
Further, if your total income as reduced by LTCG is below the maximum amount not chargeable to tax, then the gains shall be reduced by the amount by which the total reduced income falls short of the amount not chargeable to tax. Balance LTCG tax shall be computed at a basic rate of 20.6% (inclusive of education cess).
Additionally, if your total taxable income (including LTCG) during the financial year (FY) 2015-16 exceeds Rs.1 crore, you will have to pay surcharge at 12% on the basic tax rate. Also, education cess will be levied on basic tax plus surcharge, if any.
Alternatively, if the shares are listed and STT not payable, the LTCG could be taxed at 10.3% (inclusive of education cess) plus applicable surcharge, if any. To avail the tax rate of 10.3% plus surcharge, if any, the LTCG should be computed without indexation benefit.
The aforesaid LTCG could be claimed as exempt from tax by investing the sale proceeds in either one residential apartment in India or LTCG in specified bonds subject to the fulfilment of conditions specified under the domestic tax law. If the listed shares are held for less than 12 months from the acquisition date, the gains will be classified as short-term capital gains (STCG). It should be computed as the difference between net sale proceeds (after deducting the incidental transfer charges) and cost of acquisition.
If the STT is liable to be paid at the time of sale, STCG will be taxed at flat rate of 15.45% (inclusive of education cess). Additionally, surcharge, if applicable will have to be applied. However, if STT is not payable, then STCG shall be taxable at the applicable maximum tax rate. Also, surcharge, if applicable, and education cess should be levied.
If the shares happen to be unlisted in India, the period of holding to classify as long term will be 36 months instead of 12 months. Further, the benefit of lower rate of tax of 10.3% (including education cess) plus surcharge, if any, without claiming indexation benefit will be not available in case of unlisted shares. In other words, tax will be levied at 20.6% (including education cess) plus surcharge, if any, by claiming indexation benefit in case of sale of unlisted shares.
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