Bombay High Court | Photo: Wikipedia
If shares are transferred as a gift, there may not be capital gains tax on them, provided a recent Bombay High Court ruling sets a precedent.
In a case related to Mumbai-based Jai Trust versus Union government, the court ruled that a gift is a consideration-less transaction, and hence, not liable for capital gains tax.
It quashes the reassessment notice issued by the tax authorities alleging that a specific income has escaped assessment on transfer of shares as gift by the trust.
The court held that a gift is a voluntary transfer and does not require a consideration, and when there is a consideration received, only then can the profit or gain be measured.
The assessee being a trust, had filed a ‘zero’ return of income, which was accepted and processed.
The assessee had transferred shares of United Phosphorus (UPL) and Uniphos Enterprises Limited (UEL), both public listed companies, to one Nerka Chemicals Private Limited (NCPL). It was by way of a gift without any consideration.
Thereafter, the trust received notice and filed its objections against reopening of assessment, which the assessing officer had rejected.
The assessee challenged it through a writ petition in the court.
The court observed that when all three conditions — capital asset, transfer of such capital asset and profit/gains arising on such transfer — are fulfilled, the profit or gain can be charged to income tax under the head capital gains.
It also observed that for computing capital gains, there should be consideration received. The income chargeable under the head capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset.
The court also observed that the assessing officer submitted an after thought — that the assessee being a trust, it can be reasonably presumed that the transfer was for a consideration. This is because anything a trust does is for the benefit of its beneficiaries.
It held that one cannot proceed on hypothesis and deal with such a presumptuous argument.
Manish Garg, transfer pricing and litigation expert at AKM Global, said the judgment is likely to provide clarity on transactions where capital assets are transferred without consideration.
He said the tax department often views these transactions as tax planning tools and tries to plug the underlying evasion.
Historically, transactions involving the transfer of capital assets by trusts have been a matter of litigation on a variety of issues, he said. He added that transfer of shares is taxable in the hands of the recipients under the head income from other sources.
FAQs
If shares are transferred as a gift, there may not be capital gains tax on them, provided a recent Bombay high court ruling sets a precedent. In a case related to Mumbai-based Jai Trust versus Union government, the court ruled that a gift is a consideration-less transaction, and hence, not liable for capital gains tax.
Can I gift shares to avoid capital gains? ›
If you gift business assets or shares in your own trading company, then you may qualify for relief from CGT on the transfer.
Can you avoid capital gains tax by gifting? ›
Consider the potential impact of capital gains taxes
If you gift cash, generally there are no income tax consequences for the recipient, though there could be gift and estate tax implications to the donor. But if you give appreciated securities, the capital gains taxes can be significant.
Is capital gains on sale of shares received as gift? ›
Section 47 exempts capital gains on gifting of shares, even though it falls under the definition of “transfer”. However, if the recipient of the shares falls under the definition of relative as per Section 56, then there is no tax due in the hands of the receiver.
What is the period of holding for capital gains in case of gift? ›
The period of holding starts from the time of share purchase by the person who gifted you the shares (donor). Thus, if you sold the shares within 12 months of their purchase by the donor, you will have to pay short-term capital gains.
Does a gift of equity reduce capital gains tax? ›
A gift of equity is not directly taxable for the recipient but could incur higher capital gains taxes later on. 8 This is because the gift of equity reduces the buyer's cost basis, increasing the likelihood that they will earn a profit (the future sale price minus the cost basis) if they sell the property.
How to avoid capital gains tax on shares? ›
13 ways to pay less CGT
- 1) Use your CGT allowance. ...
- 2) Give money or assets to your spouse or civil partner. ...
- 3) Don't forget your losses. ...
- 4) Deduct your costs. ...
- 5) Increase your pension contributions. ...
- 6) Use your ISA allowance – each year. ...
- 7) Try Bed and ISA. ...
- 8) Donate to charity.
When a person receives a gift of stock, they assume the tax liability on any earnings previously accumulated. On the other hand, they do not have to pay taxes on those profits until they sell the stock. For 2023, the maximum gift exclusion is $17,000 per person per year.
What is the tax basis for gifted stock? ›
Example of Gifted Stock
If the fair market value was more than the original basis when you received it, you use the original basis when you sell it. So, if your father bought the stocks for $25 per share and gave them to you when they were valued at $30 per share, you would use the original basis of $25 when you sell.
Can you gift shares to a family member? ›
It's important to note that the gift of shares is tax-exempt under the provision of Section 56(2)(x) of the Income Tax Act, as it falls under the category of 'property received from a relative. ' Once the necessary transfer formalities are completed, the gift becomes irrevocable.
Inherited stock, unlike gifted securities, is not valued at its original cost basis—a term used by tax accountants to describe the original value of an asset. When an individual inherits a stock, its cost basis is stepped up to the value of the security, at the date of the death.
Can I transfer shares to my son? ›
Keeping shares in the family: if it's a family-owned business, transferring shares to your kids ensures the business stays within family walls. Tax efficiency: if you're a small investor, gifting your kids shares helps to ease the tax burden by a small percentage.
What is the lifetime gift tax exemption for 2024? ›
As a result, for 2024, a single taxpayer can claim a federal estate and lifetime gift tax exemption of $13.61 million. Couples making joint gifts can double that amount. This exemption has helped affluent families pass along substantial gifts tax-free.
What is the holding period for gifted stock? ›
Gifts — Your holding period includes the time the person who gave you the shares held them. However, your basis might be the fair market value at the date of the gift. If so, your holding period of the gifted stock will begin the day after you received the gift.
Can I gift stock to my child to avoid capital gains? ›
Gifting appreciated stock can be a great alternative to simply giving your children cash. The reason is that by giving away stock that has appreciated in value (and held at least 12 months), you do not need to recognize the capital gain in the process.
Are gifts exempt from capital gains tax? ›
Is Capital Gains Tax payable on a gift? You may have to pay Capital Gains Tax when gifting an asset to someone, depending on who that person is. You do not have to pay CGT on assets you gift (or sell) to a spouse or civil partner, unless you're separated and did not live together during the tax year in question.
Can you gift stocks to avoid taxes? ›
Gifting stocks may be a way to both give and avoid paying capital gains taxes. Instead of donating cash, investors can donate stock to charities. Investors can donate stock to their kids through custodial accounts.
Can you donate stock to avoid capital gains tax? ›
Tax Benefits of Donating Stock to Charity
If the stock has increased in value from the time of purchase, the owner can avoid paying capital gains tax by donating the security to a qualified charitable organization.
What are the rules for gifting shares? ›
It's important to note that the gift of shares is tax-exempt under the provision of Section 56(2)(x) of the Income Tax Act, as it falls under the category of 'property received from a relative. ' Once the necessary transfer formalities are completed, the gift becomes irrevocable.
Can I transfer my shares to a family member? ›
According to the Income Tax Act, gifts you give to a close relative are non-taxable. Nonetheless, if you want to give a gift of shares to a non-relative, what you gift, shares from a Demat account, will be taxable if the value exceeds Rs. 50,000 in a year.
 "Gifted shares may escape capital gains tax if HC ruling sets precedent (1)")
