How does the transfer of shares get taxed?
Recently, one of our readers asked us about transferring shares. They asked, “What are the tax implications if I transferred shares to my spouse’s name? Does the spouse need to pay tax if they do not sell the shares? If I have it for a long term, when will it be considered long term after transfer?”
Firstly, you can transfer shares to your spouse or anyone else in two ways. Either you can transfer shares through a will/inheritance, or you can gift it to them.
The transfer process is simple. All it needs is simple online documentation and the usual transfer fee which varies from broker to broker, plus 18 per cent GST.
However, the tax-related implications of such a transfer can be significant and nuanced. The taxability of transferred shares depends on three major factors.
- The mode of transfer
- Holding period
- Cost of acquisition
Let us look at each of them separately
Mode of transfer
Taxability of gifted shares depends on whether it’s a will/inheritance or a gift. Further, it also depends on who is the recipient of these shares. Let’s look at the three possible scenarios.
- Transfer as a will or inheritance.
- In this scenario, there is no tax liability, irrespective of whether or not the recipient is a relative.
- Transfer as a gift to a non-relative.
- In this case, if the aggregate value of such shares transferred in a year exceeds Rs 50,000, it becomes taxable for the recipient.
- Transfer by way of gift to a relative.
- There is no tax liability in this case, but the definition of ‘relative’ is quite elaborate and covers the following people:
- Your spouse
- Your siblings and their spouses
- Your spouse’s siblings and their spouses
- Your parents’ siblings and their spouses
- Your lineal ascendants and descendants, as well as their spouses
- Your spouse’s lineal ascendants and descendants, as well as their spouses
Next, there is the consideration of the holding period.
Stocks held over the long term and short term are taxed differently. Also, if you transfer your stocks to a relative, they become taxable only when your relative eventually sells the shares.
The combined holding period is considered to decide whether the gains are long-term or short-term. It is the period for which you hold the shares before transferring them to your relative, combined with the period for which your relative holds them before they sell them.
For example, if you bought the stocks on January 1, 2022, and gifted them to your spouse on September 1, 2022 and the latter chooses to sell these shares before January 1, 2023, the combined holding period will be considered short-term (less than 12 months).
In this case, your relative has to pay a short-term capital gains tax of 15 per cent. But if your spouse chooses to sell it after January 1, 2023 – which is more than 12 months – she’d be taxed 10 per cent, provided the gains exceed Rs 1 lakh.
Cost of acquisition
Further, you need to consider the cost of acquisition.
- If you transfer or gift your shares to a relative, then the cost of acquisition for your relative is the same as the cost at which you acquired the shares.
- If you transfer the shares to a non-relative, and the transaction is non-taxable, then the cost of acquisition for them is the same as it was for you.
- However, if you transfer the shares to a non-relative, and the transaction is taxable, then their cost of acquisition is the value of the gift, which is to be taxed.
Suppose you transfer shares worth Rs 49,999, their cost of acquisition remains the same as the cost on which you acquired the shares. However, if you transfer shares worth Rs 50,000 or more, their cost of acquisition changes to the value of the shares you gift them.
Grandfathering of gains
For those new to this term, a grandfather clause is a provision where an old rule continues to apply to some existing situations when a new rule is introduced. In all future cases, the new rule holds valid.
In this case, the grandfathering of gains applies only to equity shares and units of equity-oriented funds.
According to this clause, any long-term capital gains prior to February 1, 2018, become tax-free. However, any losses can be claimed only if they are absolute, which means if you sell your shares for lower than the buying price.
In short, grandfathering of gains boils down to what you can claim as your cost of acquisition.
Your cost of acquisition becomes the higher of
1. The actual cost of acquisition (whatever you paid to purchase the shares or units), and,
2. The lower of,
- Fair market value as on January 31, 2018.
- Sale consideration received.
Let’s look at three different examples that explain this phenomenon.
Suppose you bought some shares on January 31, 2015, for Rs 10 each and sold them for Rs 100 each in 2023. You are now eligible for grandfathering of gains and do not have to pay any tax on your long-term gains up to January 31, 2018. The gains after January 31, 2018 are however taxable.
Next, assume you bought these shares on January 31, 2015, for Rs 10 each. In 2018, their price increased to Rs 100 each, but in Jan 2023, their price dropped to Rs 20 each. In this case, while you will not have to pay any taxes, you cannot claim a loss either.
However, if you bought these shares on January 31, 2015, for Rs 10 each. In 2018, their price increased to Rs 100 each, but in Jan 2023, their price went down to Rs five each; you could claim a loss and offset it.
You can look at your holdings and calculate how much gains are taxable.
Or better yet, head over to ‘My Investments’ and add your investments, and we will tell you what your gains are and how much tax liability you have.
Clubbing of income
Lastly, the clubbing of income provisions is applicable when income is generated from the asset transferred. In all the following circumstances, income from the asset is taxable for you instead of your relative.
1. When you transfer your assets to your spouse without adequate consideration except when,
- As part of the agreement to live apart
- Before marriage
- Income is received when the relationship no longer exists
- Spouse acquired assets out of maintenance money
2. Transfer of assets to your son’s wife without adequate consideration.
3. Transfer of assets to someone else without adequate consideration for the immediate or deferred benefit of your spouse or son’s wife.
In short, if you wish to gift wealth to your loved ones in the form of shares, you should do it with due consideration to the various nuances of taxation.