The Hindu Business Line : Tax effect of dad’s gift to daughter

The capital gain that arises from the sale of shares would be taxable only in the hands of your daughter. You have stated that your daughter is nineteen years old which means that she is not a minor.

There is no provision in the Income Tax Act to club a child’s income in the hands of the parent, unless the child is a minor.

Therefore, even though the investment in shares is made out of monies gifted by you the income by way of capital gains on the sale of such shares will only be assessed in the hands of your daughter.

You may, however, note that long-term capital gains arising from sale of shares through a recognised stock exchange will be exempt.

I am a salaried individual and I own non-agricultural land, which is basically my father’s ancestral property.

I now propose to sell a part of this land after converting it into residential sites.

Will the proceeds on the sale of these sites be chargeable to capital gains or will it be exempt since the cost of acquisition is nil? — R.K. Shayamsundar

A capital gain will arise on the sale of the residential sites. Your cost of acquisition of the same will be the cost to the previous owner and if the previous owner has also acquired it without a cost, i.e. by way of gift, will, inheritance etc, the cost of acquisition will be the cost to such previous owner who acquired it otherwise than by these modes. This is provided for in Section 49 of the Act.

You may also note that you may, at your choice, substitute the fair market value as on April 1, 1981, as the cost of acquisition.

Are short-term capital gains exempt from tax? If not, what is the rate of tax for short-term capital gains? — Tony

Short-term capital gains are not exempt from tax. The rate of tax applicable for short-term capital gains will be the normal rates applicable to an individual. If, however, the short-term capital gain is from sale of shares and if the sale is through a recognised stock exchange such capital gain will be charged to tax at 10 per cent (as increased by the appropriate surcharge and additional surcharge) as provided for in Section 111A of the Act.

You may note that the Finance Bill 2008 proposes that the said 10 per cent be increased to 15 per cent with effect from assessment year 2009-10.

If a father invests in National Savings Certificate (NSC) in the name of his minor children, can the father claim deduction under Section 80C in respect of such investments? — Venkata Ratnakar

The investment made by an individual in NSCs in the name of his minor children will not make the individual eligible for deduction under Section 80C.

I am a senior citizen. My husband, who is 78 years old, is holding shares which he purchased more than 15 years ago. He now proposes to transfer them from his demat account to a joint demat account.

My husband is a pensioner and is not assessed to income tax. The value of the shares, which he proposes to transfer to the joint demat account, could be worth a few lakhs.

Would we have to pay any tax in the event of selling theses shares? My personal income is much below the maximum amount not chargeable to tax. — Malathy Menon

There will be no tax incidence on the transfer of shares from your husband’s individual demat account to the joint demat account. You may also note that since the shares are acquired more than 15 years back, the same will be treated as a long-term capital asset, having been held for more than 12 months. The long-term capital gain on sale of such shares, if through a recognised stock exchange, will be exempt from tax.

If the sale is not through a recognised stock exchange, the long-term capital gains will be chargeable to tax only in the hands of your husband and will not be chargeable in your hands.

During the financial year 2007-08, I have a short-term capital gain from sale of shares. The short-term capital gain is likely to be around Rs 50,000.

Since these shares were sold through a recognised stock exchange, I understand that the rate of tax would be 10 per cent. During the financial years 2004-05, 2005-06 and 2006-07, I had incurred substantial losses in share trading.

Can I set off the losses of the last three years against the profits of the current year, thereby paying no taxes on the short-term gain? — P.C. Vincent

Apparently, the losses of the earlier years are also from dealing in shares. You will, however, have to examine whether these losses arose from the sale of shares which are short-term or long-term capital assets.

If the loss arose from the sale of shares, being short-term capital assets, there should be no difficulty in the set off of such losses against the gain of the current year. You may, however, note that even in such circumstances the set off is possible only if you have filed your return within the time allowed under Section 139(1).

If the loss of the earlier years arose from the sale of shares that were long-term assets and if the same was through a recognised stock exchange the loss would have to be ignored and cannot be set off since the gain if any would have also been exempt. You may note that since the gain is exempt the loss if any would also get ignored.

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