Gifting shares to children: Know the tax rules on transfer and sale

Taxability rules for gifted shares

Gifting shares from a parent is a common way to transfer family wealth. Today's Ask Wallet Wise query decodes what are the tax implications of transferring shares received as a gift from a parent. 

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 father transferred all his shares from his demat account to mine in January 2018 after which he closed his demat account. He is no longer dealing in equities. Kindly guide me on the taxation part if I sell these shares now. What will happen if I transfer the stocks to my major child and she sells them a year or  I transfer them to my minor child?

Expert advice: Section 56(2)(x) of the Income Tax Act provides that the recipient must pay tax on gifts received if the aggregate value of such gifts during a financial year exceeds Rs 50,000. However, gifts received from specified relatives, including parents, are exempt from tax without any threshold limit.

The shares transferred by your father to your demat account are to be treated as a gift from your father to you, and hence, there was no tax implication at the time of transfer.

If you sell these shares now, you will be liable to pay long-term capital gains (LTCG) tax at 12.5 percent on the gains, as the shares have been held for more than 12 months. The capital gains will be computed by deducting the cost of acquisition from the sale price. For you, the cost price will be the closing price of these shares (including any bonus shares allotted before February 1, 2018) as on January 31, 2018, since the shares were originally acquired by your father before that date.

In case any bonus shares were received by you after January 31, 2018, the cost of such bonus shares will be treated as nil for computing capital gains. These will be considered long-term if sold after 12 months from the date of allotment.

If you transfer these shares to your major or minor child, there will be no immediate tax implications, as gifts from parents are not treated as income. However, when these shares are eventually sold, your child will have to pay capital gains tax in the same manner as explained above.

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