Transferring of shares to family member

Taxation
21

Don’t have a source for now, it is just based on my basic understanding of the tax laws.

Hope you agree that the non-relative will have to pay a gift tax.

If that is agreed, then we would have decided on what amount they have to pay the tax on.

The market value of the security on the date of gift will be that amount, if I am gifting shares worth ₹10 lacs, then the donee would pay tax on the ₹10 lacs.

Since the donee already paid tax on the 10 lacs, it would in turn become his cost of acquisition, and from then on, tax needs to be paid only on the future capital gains with 10 lacs being the cost of acquisition.

22

Yes. On fair market value.

I have linked to sources that state buy value and date remains same. Relative part comes only into the picture for gift tax. Not for capital gains (w.r.t buy price and date)

@quicko can clarify. If we gift shares to friend or non relative, is their buy price the same as ours, after they have paid full gift tax on the FMV of the shares?

23

While we wait for quicko to answer, let me explain my POV using an example.

If i am gifting a share purchased initially @ 10 lacs to a friend and the FMV on the date of transfer/gift is say ₹50 lacs.

Now my friend would have to pay a tax on the entire ₹50 lacs, let’s assume for simplicity a tax rate of 10% , so my friend’s gift tax would be ₹5 lacs.

Since he has paid tax on ₹50 lacs, his cost of acquisition(COA) will become ₹50 lacs and not ₹10 lacs.

If we assume that even after paying the gift tax, my friend’s COA will be ₹10 lacs (i.e., same as the donor), then in future, he would end up reporting higher capital gains, and pay higher tax.

That is, if he sells those shares for 1 Cr later, his capital gains would be 90 Lacs (1 Cr - 10 Lacs) if we are gonna assume the COA is gonna be same as the donor.

But as per my POV, since the COA of donee is the FMV on the date of gift, the actual capital gains would only be (1cr - 50 lacs) = 50 lacs.

So doesn’t the FMV becoming the COA of a non-relative donee make sense now ?

Once a gift tax has been paid, it is as good as buying those shares at FMV on the date of gift, which in turn becomes the COA of the non-relative recipient.

PS: Only when the transfer/gift is to a relative, the COA of donor and the donee will remain the same, as no gift tax is involved.

24

Ahhhh…This was tough :relieved:

I was finally able to find the source, more importantly, the sections of the Income Tax Act, that would support the fact that the COA of a recipient (who is not a relative) will be the FMV on the date of gift.

IMG_20240819_222307
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Source:Taxmann

You can read the following 2 sections of the ITA together to get clarity.

  1. Section 49(4)
  2. Section 56(2)(x)

In summary:

Section 49(4) essentially states that where the “receipt” of a capital asset has been subject to tax under Section 56(2)(x) of the Act in the hands of the recipient, the Tax FMV of such capital asset which has been considered for computing income under Section 56(2)(x) shall be deemed to be the cost of acquisition of such capital asset in the hands of the recipient.

56(2)(x) of the Income-tax Act, 1961 (“Act”) provides that where any person “receives” any specified “property” (which includes shares and securities without consideration or for a consideration which is less than its fair market value, as determined in accordance with the applicable rules (“Tax FMV”), then, the Tax FMV (where the property is received without consideration) or the excess of the Tax FMV over the consideration paid would be subject to tax in the hands of the recipient of “property” as “income from other sources”.

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25

Any simple way to explain to others

26

:smile:

There are 2 scenarios involving gifts.

1) Gift to a relative :

Where any capital asset (eg: shares) is gifted by a relative, the recipient/donee is not required to pay any tax on this gift and and the Cost of acquisition (COA) of the donor will become the COA of the donee.

Eg: If i purchased shares at ₹100 and gifted it to my Brother, the purchase price for my Brother will be ₹100 even though he did not pay any money to acquire it from me, and when he later sells those gifted shares at ₹500, his capital gains will be (₹500 - ₹100) = ₹400.

2) Gift to a Non-relative (eg: Friend)

Where any capital asset (eg: shares) is gifted by a non-relative, the recipient/donee is required to pay tax on the market value (FMV) of the shares prevailing on the date on which the shares were gifted.

And the Cost of acquisition (COA) of the donor is irrelevant , the COA of the recipient/donee will be the FMV of shares on the date of gift and tax has to be paid on this FMV.

Eg: If i purchased shares at ₹100 and gifted it to my Friend on a day when the shares had a market value of ₹200, my friend would have to pay tax on ₹200. As he is not my relative and did not pay me any money to acquire it, so he is required to pay tax on it.

After paying the tax on the gift, my friend’s cost of acquisition of such shares will become ₹200. (My COA of ₹100 is not relevant here)

Later after a few years, when he decides to sell those shares at ₹500, his capital gains will be (₹500 - ₹200) = ₹300.

In simple terms, when you pay a tax on the gift, although you did not pay any money to acquire it in the first place, for calculating your future capital gains, your cost of acquisition will be the FMV of such shares prevailing on the date of the gift, not the COA of the Donor.

For the purpose of this section, “relative” means:
In case of an individual-
Spouse of an individual
Brother or sister of the individual
Brother or sister of the spouse of the individual
Brother or sister of either of the parents of the individual
Any lineal ascendant or descendant of the individual
Any lineal ascendant or descendant of the spouse of the individual
Spouse of the persons referred to in items (B) to (F)

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27

Thanks for the sources and for correcting me

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28

Thank You very much @SG_13
Was bit confused with the terms COA & FMV. But now clear :slight_smile:

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29

won ipo in father and brother account. i like to know if its safe to transfer as gift via console and avoid tax like stcg.
@nithin @Meher_Smaran

30

Hi @Joe_Maxpayne

Your family members will be taxed accordingly on selling shares subsequently. You won’t be taxed if the gift is made to members defined as family as per the Income tax act.

31

as per the link it says, my family member wont be taxed for gift. only i will be taxed at the time of selling the shares.
so none of the family members are taxed at the time of gift, tax comes only at the time of selling the gifted shares. am i correct?
and does console register and report this as gift correctly? or do i have to do this via cdsl?

32

If shares, ETFs, mutual funds, etc., are received as a gift and subsequently sold, the income would be taxable under the head Income from Capital Gains. Tax at applicable rates should be paid, and the recipient should file ITR-2

That’s correct.

As you are transferring to your family members, you can use the acquisition cost for taxation purpose. You can take the same from CDSL for now. We’re currently working on showing an option to select acquisition price or the price as of date of transfer in console.

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33

Hi @tallerballer @nithin @Meher_Smaran @Jason_Castelino
It’d be great if you could provide a clarification for me on a related topic.
I received some shares from my father in FY24-25. The transaction was made through CDSL and the category was given as gifting to family member, I can also see it showing up on my AIS as of now. My doubts are:

1)Should I report the transaction during filing this year, even if i do not sell and realize the gains in this FY ? If yes, what section should I report it under.
2) The shares were bought by my father way back in 1981 and then later dematerialized to his demat account in 2022 and then transferred to me this year. So, if and when I sell it, what will be the COA and how do I report it in my ITR.

Thanks in advance

34

Yes, report value on day of transfer. You can report it as exempt income.

Highest price of share on 31st Jan 2018 will be your buy price.

In effect, the taxpayer can claim the highest price quoted on the recognised stock exchange on 31 January 2018 as the COA and claim the deduction for the same.
https://cleartax.in/s/ltcg-sale-stocks

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