Tax Query: Taxation implications on demat transfer of shares
My father-in-law, who is over 65, has been investing in shares for more than 20 years. He has a corpus of around ₹40 lakh invested in around 40 shares. Many of the shares were bought before 31.01.2018. He has named his daughter (who is employed with the Central government and is an income tax assessee) as nominee for his investments in shares.
His annual income is below taxable limit and he has not been filing income tax returns annually. Now, due to his age and to avoid taxes, he wishes to gift these shares equally to his daughter (who is above 40), grandson and granddaughter (both are majors but have not started earning income).
If these shares are transferred from his demat account to these three persons’ demat account using delivery instructions slip, will they get reflected in AIS, form26AS of my father-in-law? If so, under what head? Will he have to file IT return because of this transaction? What is the procedure he can adopt for smooth transfer of shares, without any of them having to pay tax?
Is it advisable to transfer now or wait till his lifetime?
Muralidharan Nair
These transactions would be viewed as “Statement of Financial Transactions” (SFT) under AIS and would be appearing in the AIS of your father-in-law (transferor) and each of the transferees. As there is no TDS or TCS involved in this transfer, these would not be reported in Form 26AS.
This transaction would be exempt from tax under Section 56(2)(x) of the Income tax Act, 1961. The section allows for gift of movable property to specified list of relatives (daughter, grandchildren are covered in the list). Hence, there would be no tax payable on the gift of shares. If the shares are inherited by the transferees after the lifetime of your father-in-law, there is still no tax payable on the inheritance.
As this is a planned transfer (as a gift), your father-in-law could execute a gift deed mentioning the details of the gift and the transferees. This would make it easier to explain to the tax authorities in case of a notice issued based on transactions reported in AIS.
Once the transfer is effected, the dividends received from these shares are taxable in the hands of the respective holders. The same would need to be included in their tax return as well. Similarly, when the shares are sold, the resulting capital gain/loss is taxable. While computing capital gains, date of acquisition of shares and their cost to the original owner (your father-in-law) would be considered.
The author is Partner, Deloitte India