What are the tax implications on gifted shares?

I have a few queries regarding income tax on gifting shares.

Me (Arvind) => A; my brother's wife => B; my friend => C

1. If A gift equity shares to B, what tax implication will A and B have?

2. If A lends shares to B by transferring them to B's demat account and gets them back after some time, what tax implication will A and B have?

3. If A gift equity shares to C, when will the tax be levied? At the time of gifting or when C sells the shares? 

- Arvind Sharma

Under the tax provisions, transfer of a capital asset as a gift does not attract capital gains tax. Where a person receives any movable property worth less than ₹50,000 from another for no consideration, it is taxable in the hands of the recipient as ‘income from other sources’ (with certain exceptions). However, this provision does not apply to property received from specified relatives. We have responded to your queries accordingly:

1) The gift of shares by A to B is not considered a ‘transfer’ and hence there will be no capital gain tax for A on this transaction. Also, receipt of gift of shares by B won't be taxable in B’s hands since the gift is received by her from a specified relative (i.e. the brother of her spouse). When B sells these gifted shares, she will be subject to capital gains tax. However, her cost of acquisition will be deemed to be the same as A's.

Also read: How are profits from transferring an under-construction property taxed?

2) Generally, lending an asset is not construed as a ‘transfer’ in since ownership remains with the original holder (A in this case). Also, even if it was a gift as discussed above, receipt of such asset from a specified relative may not be construed as a taxable ‘gift’. The loan agreement, underlying transaction documents, conditions, etc would need to be examined to verify the transaction.

3) The gift of shares by A to C (who is a friend) is not considered as ‘transfer’ and hence there will be no capital gain tax on A in this transaction.

However, receipt of such a gift by C (unless done on the recipient's wedding day or any other specified occasions), will be taxable at FMV (as defined) in hands of C if the FMV of the shares exceeds ₹50,000. It will be taxable as ‘income from other sources’ at the applicable slab rate at the time of receipt. If C sells these gifted shares, he will be subjected to capital gains tax. However, his cost of acquisition will be deemed to be the FMV used for the tax calculation above.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

Also read: What is the date of transfer for tax purposes?