If shares are gifted, they might not be subject to capital gains tax, if a recent decision by the Bombay High Court establishes precedent.
In a case involving the Union government and the Mumbai-based Jai Trust, the court determined that a gift is not subject to capital gains tax because it is a consideration-less transaction.
Since its income was divided among beneficiaries, Jai Trust reported "NIL" total income on its income tax return for the 2010–2011 fiscal year. The shares transferred as gifts were properly disclosed in the return.
The court emphasized that three requirements must be satisfied in order for an income to be subject to capital gains tax liability. These requirements are as follows:
There needs to be a capital asset, it needs to be transferred, and the transfer needs to result in a profit or gain. The provisions of Section 45 pertaining to capital gains were not applicable because the transfer of shares fell under the exemption granted by Section 47(iii) because it was a gift.
Dismissing the notice given to Jai Trust on the accounts of the reassessment of tax forms. In a gift deed dated February 26, 2010, Jai Trust gave Nerka Chemicals shares of United Phosphorus and Uniphos Enterprises.
This pioneering decision by the Bombay High Court clarifies the tax implications of capital gains from financial assets received by means of gifts.
Know if you owe any tax on your assets received by gifts or any other method of transfer of assets.
What is capital gains tax?
'Capital gains income' is any profit or gain derived from the sale of a capital asset. These capital gains are subject to taxation in the year that the capital asset is transferred.
1. Short-Term Capital Gains Tax
A short-term asset is any asset that is held for less than three years. For immovable properties like a house property, a piece of land, a commercial property, etc., the time frame is 24 months. The proceeds obtained from the sale of an asset of this type would be subject to short-term capital gain taxation.
Within a year of purchase, equity shares listed on a stock exchange may be sold, and the seller may realize a short-term capital gain (STCG). When shares are sold for more than the purchase price, the seller experiences a short-term capital gain. The tax rate on short-term capital gains is 15 per cent.
2. Long-Term Capital Gains Tax
A long-term asset is any asset held for more than three years. Gains from the sale of such an asset would be taxable as long-term capital gains and would be subject to taxation.
If they are held for more than a year, assets such as zero-coupon bonds, preference shares, stocks, securities, and equity-based mutual funds units are also regarded as long-term capital assets.
When a seller of equity shares or equity-oriented units of a mutual fund realizes a long-term capital gain of more than Rs. 1 lakh, the gain is subject to a 10 per cent long-term capital gains tax (plus any applicable cess).
Expense occurred during the sale of assets
To determine the net gain or loss resulting from the transfer of shares, registration fees, brokerage fees, and other charges are subtracted from the securities sale price.
