Gift Tax Rules: Gifts have an Impact on Your Tax Situation
Like they say, don’t judge a book by its cover. Similarly, there is more to gifts then the wrapper. Actually, there may be tax hidden there!
Transaction of shares is as much more complicated than it appears. It falls under more than one law. In an age where the authorities tax almost everything on the planet. Gifts cannot be without taxes either. Therefore, it is necessary to understand the taxability of gift received by you in your hands.
You not only need to have knowledge of your income or losses but also about the gifts you receive.
As per the Income Tax Act, 1961 gifts received are taxable in the hands of the person receiving it. These gifts may be in any form – cash, jewellery, movable and immovable property, shares, etc.
The tax authorities have adopted a strict posture to avoid tax evasion in the form of gifts. Therefore, if the value of gifts exceeds Rs. 50,000 then the entire amount shall be taxable as “Income from other sources”. However, if the aggregate value of gift received from a person is less than Rs. 50,000 then the entire amount shall be exempted from taxation.
If any individual receives any share as a gift, without consideration, the aggregate Fair Market Value of which exceeds Rs. 50,000 than the whole of the aggregate fair market value of such movable property shall be taxable. If the aggregate fair market value of a share does not exceed Rs. 50,000 then nothing is taxable in hands of Donee.
For example, if the Fair Market Value of share received as a gift received during the year ending 31 March 2017 is Rs 35000, then it shall be wholly exempted BUT in the case where it is Rs. 59000 then the entire amount of Rs. 59000 is taxable.
There are few exemptions to taxability of gift. If you receive a gift from your relative it is fully exempt under the Income Tax Act, 1961. All the gifts received from the relative irrespective of its value are exempted from taxation.
For the purpose of claiming this exemption, a relative means spouse, brother or sister of an individual or of the spouse, brother or sister of either parent, lineal ascendant/descendant of an individual or of the spouse of all the above-mentioned relatives.
In case of Marriage of the individual the gift received will not be charged to tax. Apart from marriage, there is no other occasion when monetary gift received by an individual is not charged to tax. Hence, a monetary gift received on occasions like birthday, anniversary, etc. will be charged to tax.
Since shares are “movable property”, it is not mandatory to execute a gift deed. In order to create a legal record, it is best to execute a gift deed on an appropriate stamp paper.
Receiving/ Giving shares as gifts from a person residing abroad
If you are receiving from or giving shares as a gift to a person residing abroad, you need to be cautious of not only of the taxes. There are approvals that you may need Reserve Bank of India under the Foreign Exchange Management Act, 2000.
- If there is a transfer of shares as a gift from a non-resident to a resident there is no need of any approval.
- The RBI has given general permission to a person resident outside India to transfer shares by way of a gift to an Indian resident.
- Also, a person resident outside India (other than NRI) may gift the shares to any person resident outside India (including NRIs) without any approval from the RBI/Govt in the sectors which are under Automatic route.
- Approval of Government will be required for transfer of stocks from one non-resident to another non-resident in sectors which are under Government approval route.
- NRIs may gift the shares held by them to another NRI.
However, Gift of shares by a resident to a non-resident requires a prior approval of the RBI. If you are planning to gift your shares to Non-resident the below points should be useful to you as this is what the Reserve Bank considers while processing such applications:
- The proposed transferee (donee) is eligible to hold such capital instruments under Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.
- The gift does not exceed 5 per cent of the paid-up capital of the Indian company/each series of debentures/each mutual fund scheme.
- The applicable sectoral cap limit in the Indian company is not breached.
- The transferor (donor) and the proposed transferee (donee) are close relatives as defined in Section 2 (77) of the Companies Act, 2013, as amended from time to time.
- The value of capital instruments to be transferred together with any capital instruments already transferred by the transferor, as a gift, to any person residing outside India does not exceed the rupee equivalent of USD 250,000 during the financial year.
- Such other conditions as stipulated by Reserve Bank in the public interest from time to time.
The following documents need to be enclosed while forwarding applications to Reserve Bank for approval:
- Name and address of the transferor (donor) and the transferee (donee).
- The relationship between the transferor and the transferee.
- Reasons for making the gift.
- For Government dated securities and treasury bills and bonds, a certificate issued by a Chartered Accountant for the market value of such security.
- In case of units of domestic mutual funds and units of Money Market Mutual Funds, a certificate from the issuer on the Net Asset Value of such security.
- In case of shares and convertible debentures, a certificate from a Chartered Accountant in the value of such securities, according to the guidelines issued by Securities & Exchange Board of India or as per any internationally accepted pricing methodology on an arm’s length basis from listed companies and unlisted companies, respectively.
- A certificate from the concerned Indian company certifying that the proposed transfer of shares/convertible debentures by way of gift from resident to the non-resident shall not breach the applicable sectoral cap/ FDI limit in the company and that the proposed number of shares/convertible debentures to be held by the non-resident transferee shall not exceed 5 per cent of the paid-up capital of the company.
- An undertaking from the resident transferor that the value of a security to be transferred together with any security already transferred by the transferor, as a gift, to any person residing outside India does not exceed the rupee equivalent of USD 250,000 during a financial year.
- A declaration from the donee accepting partly paid shares or warrants that donee is aware of the liability as regards call in arrear and consequences thereof.
So, next time you receive or give shares as a gift make sure to check the amount, source, type as the share you receive as a gift may also act as an additional burden on your shoulders.