How is capital gain computed on gifted shares bought before January 31, 2018?

Gift of stocks from daughter to mother

For computing capital gains on gifted shares, the cost of acquisition is taken as the cost to the previous owner. In case shares were acquired before January 31, 2018, the fair market value differs as grandfathering provisions under Section 112A of the Income Tax Act apply. Today's Ask Wallet-Wise query answers how to decide cost of acquisition of shares gifted to you. 

Moneycontrol’s Ask Wallet Wise initiative offers expert advice on matters of personal finance and money. You can email your queries to askwalletwise@nw18.com and we will try and get a top financial expert to address your queries.

My daughter acquired some shares, mostly through IPOs, before January 31, 2018. She gifted them to her mother on April 20, 2018 after she got married. Due to limited knowledge and no clear indications in income tax return (ITR) forms, the gift transaction was not reported in the previous ITRs. As she needed funds, my wife sold some gifted shares along with her shares in the financial year 2024-25. Before filing ITR-2, I seek your guidance on the following points: is reporting of the gift transaction in the ITR mandatory? For sale purposes, should we use the original cost to my daughter or the fair market value of the shares as the actual cost?

Expert advice: As per Section 56(2)(x), if the aggregate value of all the gifts received by a person exceeds Rs 50,000 in a year, the value of such gifts is treated as income of the recipient. So, as long as the value of all the gifts received does not exceed Rs 50,000 in the year, the same is not to be treated as income of the recipient.

The provision of treating the value of the gifts as income of the recipient in case the aggregate of all the gifts in a year exceeds Rs 50,000 is subject to certain exceptions. One of the exceptions provided is in respect of gifts received from specified relatives of an individual. A daughter is included in the definition of specified relatives and thus the value of shares received by your wife as a gift from her daughter was not required to be treated as her income and therefore, was not required to be reported in the ITR filed by you in the past.

While computing the capital gains on the sale/transfer of an asset which has been acquired through gift or inheritance, the price paid by the previous owner is to be treated as the cost of the seller. In case the asset was acquired prior to April 1, 2001, the fair market value of the asset on April 1, 2001 can be treated as the cost of the seller for capital gain computation. For listed shares acquired before January 31, 2018, the fair market value of as on January 31, 2018, can be taken as the cost.

Since the shares were acquired by your daughter before January 31, 2018, the closing price of the shares on January 31, 2018 can be taken as the cost by your wife, and the capital gains can be computed accordingly. Since all these shares have completed one year, the profits will be treated as long-term capital gains and will be taxed at a flat rate of 12.5 percent.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.