When it comes to taxation, there are lots of inclusions and exceptions that we have to consider. Even the gains that you make from selling your shares fall under the category of taxation. But what about gifts? As it turns out, there are specific stipulations about taxation on gifting shares. The nature of the shares also plays an important role here. If you sell shares gifted to you after a period of 12 months then LTCG on shares will need to be reviewed. Let us try to understand six important things about LTCG on tax and the provisions about them.
Taxation on Gifts
Whether it is moveable or immovable property, when you gift it without consideration taxation can be levied on it on the basis of the Fair Market Value of the property. Fair Market Value or FMV can be understood as the current market price of the gift, especially in the case of shares. If the FMV of gifted property is over Rs 50,000, then the recipient of the gift will fall under the category of taxation.
There is taxation on shares received by someone in the form of gifts under certain conditions.
Exemptions on Gifts
Giftings shares can be without taxation under conditions. They are as follows:
- If the gift is received by a relative
- If the gift is received as a marriage gift
- Gift received in the form of inheritance
If you receive shares under the above-mentioned category then you do not have to pay taxes for the gifted shares.
Sale of Gift
But if you sell the gifted shares then they will be taxed under income from capital gains. Taxation is levied depending on the holding period of the shares. If the shares have been sold after 12 months from the date of acquisition then it will be long-term capital gain. If this is the case then there will be an LTCG tax on shares. For long-term capital gain, the tax is levied at the rate of 10%. However, an important thing to keep in mind is that the cost of acquisition is computed at the purchasing price at which the owner bought it.
Gift Tax Act, 1958
According to the Gift Tax Act of, 1958, the gifts were taxable. The act has now been abolished but even while it was applicable there were exemptions out there. For instance, if you receive gifts from blood relatives then the provisions of the Gift Tax Act would not be applicable.
Short-term Capital Gains
Just like LTCG on shares is there, short-term capital gains taxes are also applicable. For taxable consideration, a short-term refers to the period of fewer than 12 months. So if you sell the shares gifted to you that had a holding period of fewer than 12 months, then it is considered a short-term capital gain. The tax levied on short-term capital gain is higher than the LTCG on shares. For short-term capital gain, you will have to pay taxes at the rate of 15%.
Even for short-term capital gains, it is calculated on the basis of the cost of the acquisition of the capital asset by the owner who gifted shares to you.
No Indexation on Sale of Gifted Shares
When you sell your long-term capital gains, LTCG on shares does not include indexation. What indexation does is that it adds the rate of inflation to the shares. This increases the cost of acquisition and in consequence, the gains made are reduced as part of it is covered by the rate of acquisition. But when you sell gifted shares for gains, no indexation benefits are added to them and you have to pay taxes on the basis of the cost of acquisition.
Other Provisions to Consider
While the six points mentioned above are integral to understanding LTCG on shares, there are other provisions to consider as well. When the gifted shares are over Rs 50,000 and have not been given by a relative, in marriage, or as an inheritance, then the full amount is charged for tax. For instance, if you receive a gift of Rs 49,000, you do not have to pay any tax. On the other hand, if the value of the gift is Rs 60,000, then the tax will be levied on the entire amount and not just on the extra Rs 10,000 from the limit.
Also, when you receive gifted shares from two different persons, if their total is above Rs 50,000, then there will be full taxation. For instance, if a person received gifted shares worth Rs 30,000 from A and Rs 25,000 from B, then the tax will be levied on their total which is Rs 55,000.
Hence, the LTCG tax on shares that are gifted has its own terms and conditions which you need to keep in mind. In some cases, you will have not have to pay the taxes at all, while in other cases there are tax implications.
