Share Gifting: How To Gift Securities, Tax Implications And Exemptions

For a stock market investor, gifting shares can be one of the ways to show affection to their loved ones. Gifting shares is a novel and unconventional way of expressing love for our near and dear ones. Older generations used to hand down documents with the details of the shares in physical form to their heirs. Nowadays with the convenience offered by demat accounts, an investor can easily transfer share ownership online.

Who Is It Ideal For?

Share gifting can also hold sentimental value for grandparents or parents gifting their children. In addition to relatives, even friends can choose to gift shares if they wish to show their affection or camaraderie. For investors looking to gift shares to their near and dear ones, here’s how they can do it:

What Is The Process of Gifting Shares

Shares can be gifted by investors via both off-market trades or online through brokerages. Off-market trades are similar to standard transactions, with the seller as well as buyer dealing directly with each other. The process starts with the gifting party depositing a delivery instruction slip (DIS) to the depository participant (DP), authorising the trade of equities from one demat account to another.

In the DIS slip, the gifting entity will need to mention the recipient’s DP ID, DO name, and client ID, in addition to details including the International Securities Identification Number (ISIN) of the stocks being transferred.

Tax Implications and Exemptions on Gifted Shares

Naveen Wadhwa, CA, Vice President, Research and Advisory Division at Taxmann, told Outlook Money: “Shares received as a gift are exempt from tax if they are received from a relative (as defined by tax laws), under a will or inheritance, or on special occasions like marriage (subject to jurisdiction-specific rules). 

Under tax laws, relatives include parents, siblings, spouse, children, grandparents, grandchildren, uncles, aunts, nephews, nieces, cousins, in-laws (father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law), and legally adopted family members.

Meanwhile for shares received as gifts from non-relatives if the original acquisition value exceeds Rs 50,000 the transfer is taxable at the time of receipt. Notably, it is taxed as per the income tax slab rates and filed under ‘Income from Other Sources.’

“It depends on the time of receiving the gift, taxability depends on who gifted it and the value of the shares. If taxable, it is treated as income from other sources. When the recipient sells the gifted shares, capital gains tax is applied based on the original purchase price and holding period from the time of acquisition,” Wadhwa said.

On sale, capital gains tax will be applicable as:

If shares received as gifts are sold within 12 months they are taxed as per the Short-term capital gains (STCG) tax rate which is 20 per cent in India for listed shares.

The Long-term capital gains (LTCG) rate is applicable if the shares are sold after the defined period. In such cases, the sale is taxed at lower rates (12.5 per cent) sometimes with exemptions up to a certain amount (e.g., Rs 1.25 lakh exemption in India).

The recipient (donee) will have to pay capital gains tax when they sell the shares. The cost of acquisition is considered the original price paid by the donor.

However, in a case of loss, Wadhwa said, “It can be set off against capital gains of the same type (short-term against short-term, long-term against long-term) as per tax laws. Carry-forward rules apply if not adjusted in the same financial year.” The transfers are irreversible once completed.

Securities are classified as movable property under the Income Tax Act 1961. While it is not mandatory to execute a gift deed for transferring equities, it is advisable to do so to maintain a legal record.

How to Transfer Shares Online

Apart from the off-market transfer, several brokerage firms offer their users the facility to gift shares directly from a demat account. The process can be simply done by updating the receiver’s details, as per the official website of Central Depository Services Ltd. (CDSL), and National Securities Depository Limited (NSDL).

Once the transfer is initiated, the brokerage platform will send an email and SMS notification to the receiver, and they will have to accept the gift within seven days. Until the recipient accepts, the stocks will remain in the account of the sender.

However, after the acceptance by the recipient, the system will trigger an email and SMS alert for the sender, requesting their confirmation of the receiver’s identity and transfer of shares.

Here are the steps that an investor can follow to gift shares online, as per CDSL, NSDL Website:

Step 1: Visit the CDSL or NSDL website and opt for the ‘easiest’ or ‘speed-e’ option

Step 2: Enter the required details on the form and submit it

Step 3: Submit a copy of the form to the depositor participant, who will then send it to the central depository

Step 4: The provided information will be verified by the authorities, and the sender will get their login details in one to two days

Step 5: Once the user logs in, they can transfer shares from their demat accounts as they please.