InvestorQ : Can you explain what exactly does the term Relative mean for the purpose of gifting shares without attracting capital gains tax?
shrinidhi Rajan made post

Can you explain what exactly does the term Relative mean for the purpose of gifting shares without attracting capital gains tax?

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Riya Dwivedi answered.
2 years ago
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There is a very comprehensive definition of the term Relative and subsumes the full list laid out under Section 56(2)(vii) of the Income Tax Act. Relatives, are herein, defined as under:

a. Spouse of the individual;

b. Brother or sister of the individual;

c. Brother or sister of the spouse of the individual;

d. Brother or sister of either of the parents of the individual;

e. Any lineal ascendant or descendent of the individual;

f. Any lineal ascendant or descendent of the spouse of the individual;

g. Spouse of the persons referred to in (b) to (f).?

As you can see from the above definition, the description of a “Relative” under the Income Tax Act is fairly comprehensive. Transfer of shares to any of the above list of people via demat mode can be done by way of gift and will not attract the provisions of the Income Tax Act. However, when the said relative subsequently, sells these shares it will be treated as capital gains in the hands of the relative.

Let us consider an illustration. Rakesh bought 500 shares of Reliance at Rs.535 on June 03rd, 2012. In Jun 2017, Rakesh transferred 500 shares by way of gift to his younger brother, when the market price was Rs.840. In August 2018, Rakesh’s brother sold these shares at a market price of Rs.1250 through the NSE. In this case, Rakesh’s brother is liable to pay long term capital gains (LTCG) on gains in excess of Rs.1,00,000. In this case, his cost of acquisition will be assumed to be Rs.535 and not Rs.840 prevailing on the date of transfer. Therefore the capital gains will be Rs.3,57,500/ {500 x (1250-535)}. A tax of 10% in excess of Rs.1 lakh i.e. Rs.25,750 (10% of 2,57,500) will have to be paid by Rakesh’s brother.

The gift tax exemption is intended to give a one-time capital gains exemption for transfer of shares to relative. However, subsequent transfers by the relatives who have got it as a gift will be classified as capital gains and taxed accordingly.

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