Gifting Unlisted Shares: Tax Rules for Giver & Receiver
· 7 min read · Written by the BuyUnlistedShares desk. Information only, not investment advice.
Gifting unlisted shares involves specific tax rules under the Income Tax Act. While the giver pays no tax, the receiver may be taxed unless the gift is from a specified relative.
What does it mean to gift unlisted shares?
Gifting unlisted shares is the process of transferring ownership of shares in a private company from one person (the donor) to another (the donee) without any payment or consideration. This is a common way to transfer wealth within families. However, this act of generosity is not without tax implications under India's Income Tax Act, 1961, and the rules differ significantly for the person giving the gift and the person receiving it.
What are the tax implications for the person gifting the shares (the donor)?
For the person gifting the shares, the tax treatment is straightforward. The act of gifting is specifically exempted from being treated as a 'transfer' for the purpose of calculating capital gains tax. According to Section 47(iii) of the Income Tax Act, any transfer of a capital asset under a gift or will is not considered a transfer.
This means that at the moment of gifting the unlisted shares, the donor does not have to pay any capital gains tax. The transaction is tax-neutral for the giver, regardless of how much the shares have appreciated in value since they were first acquired.
How is the gift taxed for the person receiving the shares (the donee)?
The tax implications for the receiver (donee) are more nuanced and depend on two key factors: their relationship with the donor and the Fair Market Value (FMV) of the shares.
Under Section 56(2)(x) of the Income Tax Act, if an individual receives any property, including shares, for no consideration (as a gift), and the aggregate FMV of such property exceeds ₹50,000 during a financial year, the entire FMV becomes taxable for the receiver. This amount is taxed under the head 'Income from Other Sources' at the receiver's applicable income tax slab rate.
Key points to note:
- The ₹50,000 limit is an aggregate annual limit. It includes all such gifts received from all non-relatives in a financial year, not just a single gift of shares.
- If the total FMV of gifts is, for example, ₹75,000, the entire ₹75,000 is taxed, not just the amount exceeding ₹50,000.
However, there is a major exception to this rule: gifts received from a 'relative' are completely exempt from this tax, regardless of their value.
Who qualifies as a 'relative' for tax exemption?
The Income Tax Act provides a specific definition of a 'relative' for the purpose of gift tax exemptions. If you receive unlisted shares from any of the following individuals, the transaction is not taxed in your hands at the time of receipt:
- Spouse of the individual
- Brother or sister of the individual
- Brother or sister of the spouse of the individual
- Brother or sister of either of the parents of the individual
- Any lineal ascendant or descendant of the individual (e.g., parents, grandparents, children, grandchildren)
- Any lineal ascendant or descendant of the spouse of the individual
- Spouse of any of the persons listed above
Therefore, gifting shares to a son, daughter, spouse, parent, or sibling is tax-free for the receiver. However, gifting the same shares to a friend or a cousin (who is not covered by the above definition) would trigger tax for the receiver if the FMV exceeds ₹50,000.
What happens when the receiver eventually sells the gifted shares?
While receiving a gift from a relative is tax-free, selling those shares later is a taxable event. The receiver will be liable to pay capital gains tax. The calculation of this tax depends on two critical elements that are passed on from the original owner (donor).
1. Cost of Acquisition: For the purpose of calculating capital gains, the receiver's cost of acquisition is considered to be the price the original owner paid for the shares.
2. Period of Holding: The holding period also starts from the date the original owner acquired the shares, not from the date the gift was received. This is crucial for determining if the gain is short-term or long-term. For unlisted shares, a holding period of more than 24 months is considered long-term.
Illustrative Example:
Let's assume the following scenario. (Note: All figures are for illustrative purposes only and do not represent actual values or recommendations.)
- January 2020: Mr. Sharma buys 500 shares of an unlisted company for ₹2,00,000 (Cost = ₹400 per share).
- February 2024: Mr. Sharma gifts these 500 shares to his daughter, Ms. Sharma. As this is a gift to a relative, there is no tax for Ms. Sharma at this stage.
- December 2024: Ms. Sharma sells all 500 shares for ₹7,00,000.
Capital Gains Calculation for Ms. Sharma:
- Holding Period: The period is calculated from Jan 2020 (Mr. Sharma's purchase date) to Dec 2024 (Ms. Sharma's sale date). This is well over 24 months, so the gain is a Long-Term Capital Gain (LTCG).
- Cost of Acquisition: Ms. Sharma's cost is Mr. Sharma's original cost, which is ₹2,00,000.
- Indexed Cost of Acquisition: To account for inflation, the cost is indexed. Let's assume the Cost Inflation Index (CII) for FY 2019-20 was 289 and for FY 2024-25 is 363 (these are illustrative values).
- Indexed Cost = ₹2,00,000 x (363 / 289) = ₹2,51,211 (approx.)
- Long-Term Capital Gain (LTCG): Sale Price - Indexed Cost = ₹7,00,000 - ₹2,51,211 = ₹4,48,789.
- Tax Payable: LTCG on unlisted shares is taxed at 20% (plus applicable cess and surcharge).
- Tax = 20% of ₹4,48,789 = ₹89,758.
How is the Fair Market Value (FMV) of unlisted shares determined?
For gift tax purposes (when gifting to a non-relative), determining the FMV is crucial. Rule 11UA of the Income Tax Rules prescribes the method for valuing unlisted equity shares. It is calculated based on the company's book value.
The formula is: (A - L) × (PV) / (PE)
- A = Book value of all assets in the balance sheet (with certain adjustments).
- L = Book value of liabilities shown in the balance sheet.
- PV = The paid-up value of such equity shares.
- PE = Total amount of paid-up equity share capital as shown in the balance sheet.
In simpler terms, it is the adjusted book value per share of the company. This valuation should be done as on the date of the gift. Given the complexity, a chartered accountant can be engaged to determine the precise FMV to ensure compliance.
Frequently Asked Questions
Can I gift unlisted shares to a friend without any tax?
A friend is not considered a 'relative' under the Income Tax Act. If you gift shares to a friend and their Fair Market Value (FMV) is more than ₹50,000, your friend will have to pay tax on the entire FMV as 'Income from Other Sources'. You, as the giver, will not have any tax liability.
I received gifted shares from my father. What is my purchase price for tax purposes?
Your purchase price (cost of acquisition) will be the same as the price your father originally paid to acquire those shares. This cost will be used to calculate your capital gains when you eventually sell them.
Is there a limit on the value of shares I can gift to my spouse or children?
There is no limit on the value of shares you can gift to specified relatives like a spouse or child, and the transaction is tax-free at the time of receipt. However, be aware of 'clubbing provisions' under Section 64 of the Income Tax Act. Any future income (like dividends) earned from the gifted shares by your spouse or minor child may be clubbed with your income and taxed in your hands.
What documents are needed to process a gift of unlisted shares?
Typically, you would need a signed Gift Deed (a legal document stating the gift is made voluntarily and without consideration), a Share Transfer Form (Form SH-4), and the original share certificate. These documents are submitted to the company or its Registrar and Transfer Agent (RTA) to record the change in ownership.
Does the ₹50,000 tax exemption limit apply per gift or per person?
The ₹50,000 limit is an aggregate limit for the receiver for an entire financial year. It includes the FMV of all specified gifts (money, movable, or immovable property) received from all persons who are not defined as 'relatives'.
How does the holding period work for gifted shares?
The holding period for calculating capital gains begins from the date the original owner (the person who gifted you the shares) first acquired them. It does not start from the date you received the gift.
What if I receive shares as part of an inheritance?
Receiving shares through a will or as part of an inheritance is treated similarly to a gift. Under Section 56(2)(x), it is not taxed in the hands of the beneficiary at the time of receipt. The capital gains rules upon subsequent sale (cost and holding period of the original owner) will apply.
Do I have to pay Stamp Duty on a gift of shares?
Yes. The transfer of shares, even by way of a gift, is subject to stamp duty. The duty is payable on the market value of the shares being transferred as per the Indian Stamp Act. The rate is currently 0.015% on the value of the shares.
Information only, not investment advice. Unlisted and pre-IPO securities carry liquidity, valuation and listing-timing risk; read the offer document and consult a SEBI-registered investment adviser for advice specific to your situation.
