Gifting Shares for Rakhi: Tax Implications in India
Gifting shares to your loved ones can be a thoughtful way to help them build wealth. For occasions like Rakhi, giving shares instead of traditional gifts is becoming popular. However, it is important to understand the tax rules that apply when you gift shares in India. These rules depend on who is giving the gift and who is receiving it.
When shares are gifted, they are transferred from one person's digital share account to another. This process has specific tax implications that every Indian investor should know. Let us explore these rules in simple terms.
Gifting Shares: A Modern Rakhi Shagun
Rakhi is a special occasion to celebrate the bond between brothers and sisters. While traditional gifts like clothes or sweets are common, a modern approach is to gift financial assets like shares. This can be a meaningful way to contribute to your sibling's financial future.
Gifting shares involves transferring them from your Demat account to the receiver's Demat account. A Demat account is like a digital locker where your shares are held electronically. Understanding the tax rules for such gifts is crucial, as they can differ based on your relationship with the person receiving the shares.
Do You Need a Demat Account to Gift or Receive Shares?
Yes, absolutely. To gift shares, you must have a Demat account where your shares are currently held. Similarly, the person receiving the shares must also have their own Demat account to accept the transfer.
Think of a Demat account as a digital bank account for your shares and other securities. Just as you need a bank account to receive money, you need a Demat account to hold shares in electronic form. Without a Demat account, shares cannot be transferred or received digitally.
Tax Rules for Gifted Shares in India
The tax implications of receiving gifted shares in India depend largely on the relationship between the giver and the receiver. The Income Tax Act has clear rules about what is taxable and what is exempt.
When Shares are Gifted by Family Members (Specified Relatives)
If you receive shares as a gift from certain family members, these gifts are completely exempt from income tax for you, the receiver. This means you do not have to pay any tax on the value of the shares when you receive them.
For income tax purposes, the term 'specified relatives' includes a wide range of family members. These typically include your spouse, your parents, your siblings (brother or sister), your children, and certain in-laws (like your spouse's parents or siblings). Gifts from these individuals are considered tax-free.
When Shares are Gifted by Non-Family Members (Non-Relatives)
The rules change if you receive shares as a gift from someone who is not a specified relative, such as a friend, colleague, or distant relative not covered under the 'specified relative' definition. In such cases, if the total market value of all shares received as gifts from non-relatives in a financial year exceeds ₹50,000, the amount above ₹50,000 becomes taxable.
This taxable amount is added to your income and is taxed under the head 'Income from Other Sources'. This rule is specified under Section 56(2)(x) of the Income Tax Act. For example, if you receive shares worth ₹70,000 from a friend, ₹20,000 (₹70,000 - ₹50,000) would be added to your income and taxed.
Selling Gifted Shares: Understanding Capital Gains Tax
It is important to understand that the tax on the value of the gift itself is separate from the tax you might pay when you eventually sell those shares for a profit. Even if you received the shares tax-free from a relative, you will still need to consider capital gains tax when you sell them.
When you, as the receiver, sell the gifted shares, any profit you make will be subject to capital gains tax. To calculate this profit, the original purchase cost of the shares for the giver is considered your cost. For example, if your brother bought shares for ₹100 and gifted them to you, your cost for those shares is also ₹100, not zero.
Furthermore, the 'holding period' for determining if it is a short-term or long-term capital gain also starts from the date the original giver purchased the shares, not from the date you received them as a gift. This is an important point for tax calculation, as long-term capital gains often have different tax rates than short-term gains.
How to Gift Shares: A Simple Overview
Gifting shares is a relatively straightforward process once both parties have their Demat accounts ready. Here is a simplified overview:
- Ensure both the giver and the receiver have active Demat accounts with their respective Depository Participants (DPs). A DP is like a bank for your Demat account.
- The giver needs to initiate a 'delivery instruction slip' (DIS) or an online transfer request through their DP. This form will require details of the shares, the receiver's Demat account number, and the DP ID.
- The DP will process the request and transfer the shares from the giver's Demat account to the receiver's Demat account. This usually takes a few working days.
- Both parties will receive confirmation once the transfer is complete.
Please note that there might be nominal charges levied by your Depository Participant for transferring shares. It is advisable to check with your DP about any such fees before initiating the transfer.
Real-Life Example: Priya Gifts Shares to Her Brother Rahul
Let us consider Priya, who wants to gift shares to her brother Rahul for Rakhi. Priya had purchased 100 shares of ABC Ltd. five years ago for ₹500 each, making her total investment ₹50,000. Today, these shares are worth ₹750 each, so the total market value of the gift is ₹75,000.
Priya transfers these shares from her Demat account to Rahul's Demat account. Since Rahul is Priya's brother, he is a 'specified relative' for income tax purposes. This means Rahul will not have to pay any income tax on receiving shares worth ₹75,000 as a gift.
Now, let us imagine Rahul decides to sell these shares two years later, when their price has risen to ₹900 per share. His selling price would be ₹90,000 (100 shares x ₹900). For calculating his capital gains, Rahul's cost of acquisition will be Priya's original purchase price of ₹500 per share. So, his profit per share is ₹900 - ₹500 = ₹400.
The total profit would be ₹40,000 (100 shares x ₹400). Since the shares were held for more than 12 months (Priya's holding period of five years plus Rahul's two years), this would be considered a long-term capital gain. This profit of ₹40,000 would be subject to long-term capital gains tax as per the applicable tax laws at the time of sale.
Sources
- Income Tax Department, Government of India — https://www.incometax.gov.in
- Securities and Exchange Board of India (SEBI) — https://www.sebi.gov.in
Key takeaways
- Gifting shares is a modern financial gift, especially for occasions like Rakhi, requiring both giver and receiver to have Demat accounts.
- Shares gifted by specified relatives (like siblings, parents, spouse, children) are completely exempt from income tax for the receiver.
- If shares are gifted by a non-relative and their market value exceeds ₹50,000 in a financial year, the excess amount is taxable as 'Income from Other Sources' under Section 56(2)(x).
- When gifted shares are sold, any profit made is subject to capital gains tax, calculated using the original purchase cost and holding period of the giver.
- Always check with your Depository Participant for any nominal charges associated with transferring shares between Demat accounts.
Frequently asked questions
Can I gift shares to my brother or sister for Rakhi?
Yes, you can certainly gift shares to your brother or sister for Rakhi. Both you, as the giver, and your sibling, as the receiver, must have active Demat accounts to facilitate the transfer of shares. For income tax purposes in India, siblings are considered 'specified relatives'. This means that shares received as a gift from a brother or sister are completely exempt from income tax for the receiver. This makes gifting shares a tax-efficient way to share wealth with your siblings on special occasions like Rakhi, helping them build their investment portfolio without immediate tax burden on the gift itself.
Is there any tax on shares received as a gift from a family member?
No, shares received as a gift from specified family members, also known as 'relatives' under the Income Tax Act, are completely exempt from income tax for the receiver. This means you do not have to pay any tax on the value of the shares when you receive them from your spouse, parents, siblings, children, or certain in-laws. This exemption is a significant benefit for family wealth transfers. However, it is crucial to remember that while the gift itself is tax-free, any profit made when these gifted shares are eventually sold by the receiver will be subject to capital gains tax.
What is a 'relative' for income tax purposes when it comes to gifts?
For income tax purposes in India, the definition of a 'relative' for gifts is specific and includes several family members. This typically covers your spouse, your parents (father and mother), your siblings (brother and sister), your children, and the spouse of your children. It also extends to your spouse's parents and siblings. Gifts received from any of these specified relatives are fully exempt from income tax. This broad definition ensures that many common family gifts, including shares, can be transferred without attracting income tax on the gift value for the receiver.
Do I need a Demat account to receive gifted shares?
Yes, it is absolutely necessary to have your own Demat account to receive gifted shares. A Demat account, short for dematerialized account, is where shares and other securities are held in electronic form. Just as you need a bank account to receive money, you need a Demat account to hold shares digitally. Without an active Demat account, the shares cannot be transferred to you. Therefore, if someone plans to gift you shares, ensure you have a functional Demat account opened with a Depository Participant (DP) well in advance to ensure a smooth transfer process.
What happens when I sell shares that were gifted to me?
When you sell shares that were gifted to you, any profit you make from the sale will be subject to capital gains tax. The key point here is that the tax is on the profit from selling, not on the value of the gift itself. For calculating this profit, your cost of acquisition will be considered the price at which the original giver bought those shares, not zero. Similarly, the holding period for determining if it is a short-term or long-term capital gain starts from the date the original giver purchased the shares. This means you benefit from their original purchase price and holding duration for tax calculations.
How do I calculate capital gains tax on gifted shares?
To calculate capital gains tax on gifted shares, you need two main pieces of information: the original purchase price of the shares and the original purchase date. Your 'cost of acquisition' for the gifted shares is considered to be the price at which the original giver bought them. The 'holding period' for determining if the gain is short-term or long-term also starts from the date the original giver first purchased the shares. Once you have these, you subtract the original cost from your selling price to find the profit, and then apply the relevant short-term or long-term capital gains tax rates based on the total holding period.
Are there any charges for transferring gifted shares?
Yes, there are usually some nominal charges involved when transferring gifted shares from one Demat account to another. These charges are typically levied by your Depository Participant (DP), which is the entity that maintains your Demat account. The exact fees can vary between different DPs and may include transaction charges or stamp duty. It is always a good practice to check with your specific Depository Participant about their fee structure for off-market transfers or gift transfers before initiating the process. Understanding these minor costs helps in planning the gift effectively.
What if I receive shares as a gift from a friend?
If you receive shares as a gift from a non-relative, such as a friend, the tax rules are different. In this scenario, if the total market value of all shares received as gifts from non-relatives in a financial year exceeds ₹50,000, the amount above ₹50,000 is taxable. This taxable portion is added to your total income and is taxed under the head 'Income from Other Sources' as per Section 56(2)(x) of the Income Tax Act. For example, if a friend gifts you shares worth ₹80,000, then ₹30,000 (₹80,000 - ₹50,000) would be taxable in your hands.