The Hindu Business Line : No tax on this gift

I am a bank employee. My gross annual income is around Rs 3 lakh. My wife is a housewife and so is my married daughter. I want to invest my savings in shares and mutual funds. Keeping in mind the tax payable on the earnings by way of dividend and interest, I want to gift some money to my daughter and wife. I would like to know:

how much I can gift at a given time for it to be tax free,

whether the gifts can be given in cash,

whether there are any formalities, such as execution of a document etc.,

whether the income generated from the investment will be taxed in the hands of my wife and daughter. P. Prakash

There is no limit on the amount that you can give as gift to your wife and daughter. There will be no tax implications on the gift to your wife and daughter. The gift can be in cash or by cheque;it will not make a difference either way. It may be advisable, though not necessary, to have a letter given to the donee that the amount is a gift and given out of natural love and affection, which can then be accepted by the donee.

You may note that the dividend from shares and income from mutual funds will normally be exempt and, therefore, the question of it being taxed will not arise. Insofar as the gain, if any, on sale of the shares and mutual funds is concerned if the same is taxable, the gain earned by your wife will be clubbed in your hands because of the provisions of Section 64(1), while your daughter's gain will be taxed in hers.

My wife held shares of few companies for more than five years. After her passing, the shares devolved to me.

I have completed the formalities for the transfer. I now propose to sell these shares. Will the gain be treated as long-term capital gain, entitling me to the exemption under Section 10(38)? N. Mani

The gain will be treated as long-term capital gain and be eligible for exemption under Section 10(38) provided it is sold through a recognised stock exchange and the Securities Transaction Tax is paid at the time of sale. Section 2(42A) specifically provides that if an asset is received by way of inheritance, the period of holding of the previous owner will also be taken into account in determining whether the gain is long- or short-term.

I am retired. My only source of income during the financial year 2005-06 was a short-term capital gain from sale of shares for Rs 2 lakh. These shares were sold through a recognised stock exchange and the STT was paid at the time of sale. Will I benefit from the basic exemption of Rs 1 lakh and the deduction under Section 80C in respect of the life insurance premium paid, PPF contribution etc? R. M. Kannan

Short-term capital gain on transfer of shares where the STT has been paid at the time of sale will be taxed at 10 per cent in accordance with Section 111A, which specifically provides for setting off the basic exemption to the extent it is not utilised by other incomes against short-term capital gains taxed at 10 per cent under this Section, where the assessee is an individual or a HUF. In your case, you have indicated that you do not have any other income other than the short-term capital gain. Therefore, you can set off the entire basic exemption against the short-term capital gain. Section 111A also prohibits the claim of deductions under Chapter VI-A against short-term capital gain taxed at 10 per cent under this Section. You, therefore, cannot take the benefit of deduction under Section 80C.

In 1982, shares were allotted in an IPO jointly to my daughter and me. My daughter was the first named holder. She gifted these shares to me in July. I sold these shares through a recognised stock exchange and paid STT at the time of sale. Will the gain be treated as long-term and will it be eligible for exemption? K. S. Waman

The gain will be treated as long-term capital gain and be eligible for exemption under Section 10(38). Section 2(42A) specifically provides that if an asset is received as gift, the period of holding of the previous owner will also be taken into account in determining whether the gain is long- or short-term.

Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.