What are the tax implications of gifting shares to your grandson?

This gesture follows the tradition of grandparents gifting shares, gold, cash, and other assets, but this raises questions about the tax implications for both the giver and the receiver.

No immediate tax impact

There is no tax incidence in the hands of recipient, whether minor or an adult, if the gift is from a relative.

Should the gift come from a non-relative and exceed ₹50,000 in value, it would be taxed under income from other sources. For minors, this income would be combined with that of the parent who earns more, according to section 64 of the Income Tax Act. Thus, gifts from relatives bring no tax burden upon reception.

However, any income or gains generated from these gifts in the future are subject to tax. In the case of minors, the tax obligation falls on the parents rather than the donor.

Tax on share sale

Minors, with parental assistance, can sell gifted shares, incurring a capital gains tax of 10% on gains exceeding ₹1 lakh annually. This income is also subject to the clubbing provisions, being taxed under the parent with the higher income.

The cost of acquisition for tax purposes depends on the purchase date of the shares. For shares acquired before the capital gains tax revision on 1 February 2018, the valuation as of 31 January 2018 determines the cost. Given the previous exemption on long-term capital gains from equity, gains up to this date were grandfathered.

Recipients benefit from the original donor’s holding period, affecting the taxation on any future sale of shares. Should the holding exceed one year, it qualifies for long-term capital gains tax.

“There is no immediate tax impact for the recipient. In such cases, the tax liability is deferred to the point when the share sale is made,” said Nitesh Buddhadev, Mumbai-based chartered accountant and founder of Nimit Consultancy.

Tax on dividend income

Dividends on shares held by minors are added to the income of the higher-earning parent, following the Income Tax Act’s section 64 clubbing provisions. This income is then taxed according to the parent’s income tax slab as part of their overall income from other sources.

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Published: 20 Mar 2024, 03:36 PM IST