I want to gift 1000 equity shares to my wife. What will be the tax liability if she sells in 2-3 months?

Today, we have an interesting question from a reader who wants to gift 1000 equity shares to his wife. He had purchased these shares 10 years back, and now wants to transfer them from his Demat account to his wife's Demat account. But he is not sure about the tax liability on him or his wife if the latter sells those shares within two to three months after receiving them.

Following is the full query he sent to us:

According to CA Dr Suresh Surana, there will be no tax hassle at the gifting stage.

• Gifting of shares from husband to wife will not attract any taxes.

• The wife will not have any tax liability for simply receiving the shares as a gift from her husband.

However, things may get complicated after she sells the shares.

First, the wife may have to pay applicable capital gains tax on selling the gifted shares. In this case LTCG tax will apply (We have explained how the capital gain will be determined in this case later in the article)

“In most cases, it is seen that practically the capital gains tax on the sale of gifted shares is paid by the wife after receiving them as a gift,” said Dr Surana.

Second, the income earned by the wife from selling such shares may be clubbed with the income of the husband. Under the Income-Tax Act, the clubbing provisions are applicable in case of any income earned by the spouse on any gift received from the husband.

Dr Surana said that the Income Tax Department may invoke the clubbing provisions under Section 64(1)(iv) and attribute the capital gains to the husband (donor). This would result in the gains being taxed in the husband's hands instead.

However, tax will not be paid twice on the same capital gain.

Who enforces the clubbing provision

Generally, clubbing may be enforced by the Income Tax Department during assessments or scrutiny if they determine that the capital gain should be taxed in the hands of the husband based on various clubbing considerations.

“While taxpayers are expected to comply with clubbing provisions voluntarily, in many practical cases, the wife continues to report and pay tax on such capital gains unless questioned by the tax authorities,” said Dr Surana.

Important tax rules for gifting of shares to wife

The following are tax rules applicable in case of gifting of shares by a man to his wife:

Where the shares are gifted by a husband to his wife by way of a gift, then such transactions will not be regarded as transfers and shall not attract any tax liability in the hands of the donor.

Section 56(2)(x) of the Income Tax Act, 1961 provides that if any property, other than immovable property, with fair market value (FMV) over ₹50,000, is received by an assessee from any person without consideration, then it will be considered as income of receiver and charged to tax under the head “Income from Other Sources”.

However, if the gift is received from a relative, including the spouse, then such transaction shall not be subject to tax at the time of receipt.

As per Section 49 of the Income Tax Act, the cost of acquisition of the shares will be the cost at which the previous owner acquired them.

Any cost of improvement incurred or borne by either the previous owner or the assessee will also be included while determining the cost of acquisition.

Further, the period of holding by the previous owner will be considered while determining the period of holding for the receiver.

In the above case, since the gifted shares have been held for more than 12 months by the previous owner (assuming the shares are listed equity shares), the gains arising from the sale of such shares by the wife shall be classified as long-term capital gains (LTCG). Therefore, she shall be liable to pay tax on long-term capital gains exceeding ₹1,25,000 at the applicable rate of 12.5%.

As per section 64(1)(iv), if a man transfers (directly or indirectly) any asset (other than house property) to his wife without adequate consideration, then the income from such asset can be clubbed with his income.

Though Section 64(1)(iv) only refers to the clubbing of "income," judicial precedents have established that capital gains may also be included in income for clubbing purposes.

Dr Surana said that in Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503 (SC), the Supreme Court ruled that capital gains arising in the hands of the transferee-spouse must be clubbed with the transferor's income.

"As such, while there is no tax liability at the time of gifting, the capital gains arising from the sale of shares by the wife may be clubbed with husband’s income due to Section 64(1)(iv) and the Supreme Court ruling in Sevantilal Maneklal Sheth v. CIT," Dr Surana concluded.