Transferring shares to a friend? Here is how they'll be taxed

How is transfer of shares taxed?

• Off market share transfers are allowed using a transfer slip
• Capital gains tax applies when shares are sold to a friend
• Tax rates depend on holding period and if STT is paid

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Many investors consider transferring shares directly to someone they know but the tax impact is often misunderstood. Today's Ask Wallet Wise query explains the rules and tax treatment of such share transfers.

The Ask Wallet-Wise initiative offers expert advice on personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try to get a top financial expert to address them.

All my investments are held in listed equity shares for a very long time. I live through pension, dividends and bank fixed deposit interest without transacting in the shares held as investment. To repay money borrowed from my friend for my hospitalisation during the current year, I wish to transfer some of the shares at market price through off-market deal to his demat account. Is this permitted? Will it incur tax liability?

Expert's advice: There are no restrictions on investors transferring their shares to anyone through off-market deal. This can be done through transfer instruction slip which is available with your depository participant.

When you transfer a capital asset for a consideration, the transaction is treated as sale and is subjected to tax. The action of transferring shares from your demat account to demat account of your friend amounts to sale of your shares on which you are liable to pay capital gains tax. The rate of tax will depend on for how long the same have been held by you. If the same are transferred within a year from date of acquisition or allotment, capital gains are taxed as short-term capital gains (STCG) else long-term capital gains (LTCG).

In case the transaction is done through a broker and on which Securities Transaction Tax (STT) is paid, the short-term capital gains are taxed at flat rate of 20 percent and long-term at 12.5 percent beyond initial long term capital gains of Rs 1.25 lakh, which are taxed at a zero rate. All long-term gains arising from transfer of listed shares and equity oriented schemes are taken together for this purpose.

In case the transaction of listed shares is done through off-market deal on which STT is not paid, STCG is taxed at your slab rate and LTCG at a flat rate of 12.5 percent but the benefit of initial tax free long term capital gains of upto Rs 1.25 lakh is not available.

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