Tax Query: Will the sale of shares, transferred within family, attract tax?

My mother-in-law wants to transfer equity shares to my name or my wife’s name (as her daughter) without any consideration.

Please advise whether any tax is to be paid on such a transfer. 

Also please advise regarding taxability on the sale of such shares after transfer to our name.

K.S.V. Pathy

Your mother-in-law is not required pay taxes when she gifts shares to you/your wife. This exemption is specifically called out under section 56(2)(x) of the Income Tax Act. It is advisable to document this gift transaction. Once the shares are transferred to you/ your wife, any dividend income received from those shares would be taxable in your/your wife’s hands. The tax would need to be determined based on the applicable slab rates depending on your/your wife’s total income for that tax year.

Dividend income over ₹5,000 is subject to tax withholding at the rate of 20 per cent. 

In future, if you/your wife sells these shares, it is taxable as Income from Capital Gains. If the shares were held for more than 12 months (assuming to be listed shares), then the capital gains are taxable as long-term capital gains. If they are held for less than 12 months, then the gains would be taxable as short-term capital gains. Since these shares were gifted, the period of holding will start from the date of acquisition by the donor i.e. your mother-in-law. If the shares are not listed, the threshold for determination of long-term or short-term is 24 months. In case of long-term capital gains from listed shares, a beneficial rate of 10 per cent applies (without indexation). In the case of long-term capital gains from unlisted shares, the applicable tax rate is 20 per cent after considering the indexation benefit.

Response by Sudhakar Sethuraman, Partner, Deloitte India 

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