Gift of Listed Shares
Listed shares received as a gift are taxable in the hands of the recipient under Section 56(2)(x) of the Income Tax Act if the fair market value exceeds fifty thousand rupees in a financial year, unless the gift is from a specified relative, on marriage, or under a will.
The taxation of gifts was brought under the income tax framework to prevent tax avoidance through informal transfers of value. Section 56(2)(x), introduced as part of the anti-abuse provisions, taxes the receipt of listed shares as income from other sources if their fair market value exceeds the threshold without adequate consideration being paid.
For listed shares, the fair market value on the date of receipt is the highest price quoted on a recognised stock exchange on that date, or if no trading occurred on that date, the last recorded closing price. This market-based valuation ensures there is an objective reference point, unlike unlisted shares or immovable property where valuation disputes are more common.
The exemptions under Section 56(2)(x) are important. Gifts received from specified relatives — which include parents, spouse, siblings, and lineal descendants and their spouses — are fully exempt from this provision regardless of value. Gifts received on the occasion of marriage are also exempt, as are transfers under a will or by way of inheritance, and transfers in contemplation of death of the donor.
When shares are gifted and the recipient later sells them, the cost of acquisition for computing capital gains is taken as the fair market value on the date of the gift that was included in the recipient's income. This cost step-up prevents double taxation on the same accretion in value. The holding period for determining short-term versus long-term capital gains starts from the date the recipient acquired the shares, not from the original purchase by the donor.
Stamp duty on transfer of listed shares is generally not applicable for gifts through the depository participant (DP) route since there is no physical instrument of transfer. However, the gift giver should ensure the transfer is properly documented, and a gift deed, while not legally mandatory for movable property, is advisable to establish the bona fide nature of the transaction in the event of future scrutiny by tax authorities. Both donor and recipient should declare the transaction appropriately in their income tax returns.