Gifting to minors: Know the tax tag it carries

Recently, the gifting of 15 lakh Infosys shares with voting rights worth over Rs 240 crore, by the company’s co-founder NR Narayana Murthy to his four-month old grandson created a lot of buzz. Given the Indian stock market’s upward march, the idea of gifting financial assets to family members could catch on. Gifting, in simple terms, is an act of transferring any existing movable or immovable property voluntarily, either without any charge or at a nominal or highly discounted price.

Taxation on gifts

From  the point of view of taxation, gifts are liable to be taxed under the following circumstances:

1. Monetary gifts in the form of cash, cheque or draft - if the aggregate amount exceeds Rs 50,000 in a financial year

2. Movable property without consideration (handed over free of any charge) - If aggregate fair market value exceeds Rs 50,000 in a financial year

3. Movable property with consideration (wherein the gift comes at price) - If aggregate fair market value exceeds the consideration by Rs 50,000 in a financial year

4. Immovable property without consideration – If its stamp duty value exceeds Rs 50,000

5. Immovable property with inadequate consideration – If it is less than the Stamp duty value, then that difference between the consideration and stamp duty value exceeds Rs. 50,000 and 10% of the consideration

In other words, if the gifted amount exceeds the cap of Rs. 50,000, it will be subject to applicable tax, cess and surcharges.

When are gifts tax-free?

Gifts received from a relative, the value of gifts received being less than or equal to Rs. 50,000, the gifts received on the occasion of marriage from non-relatives or friends (if the donor is employer, then the exemption cap of Rs. 5,000 applies), gifts received as a the result of will/inheritance (excluding rental or other income earned from therein), gifts received in contemplation of the death of the donor, gifts received from a registered trust and any money or property received at the time of partition of Hindu Undivided Family are tax-free. 

Definition of a relative: According to the Explanations to Section 56 of the Income Tax Act, 1961, the following are considered as ‘Relatives’. Spouse of the individual, brother or sister of the individual, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, any lineal ascendant or descendant of the individual, and any lineal ascendant or descendant of the spouse of the individual.

Gifting shares to a minor

Do gifting shares shift the tax burden to the minor child? Are there any tax implications for him? No.  

The gifting of shares by a grandfather to his grandson can be termed as a transfer without consideration and  irrespective of the value of the shares, is fully exempt from tax in the hands of the grandson. Further, gifts by a grandfather to a grandson would not be a transfer in strict income tax terms, hence, no capital gains would accrue in the hands of the grandfather either. 

Clubbing of income of a minor child

Generally, a person is taxed on income accruing to him only and he is not liable to tax for income earned by another person, except on special cases as covered in Sections 60 to 64 of the Income Tax Act, 1961. Under Section 64(1A), while computing the total income of an individual, all such incomes accruing to his/her minor child shall be included as his/her income.

In the said case, the grandson will be entitled to all dividends to be paid by Infosys on the gifted shares and future sale proceeds received on the selling of these gifted shares. Due to clubbing of income provisions, either of the parents or both while computing their total income during that particular assessment year ‘needs to add’ the dividends or sale proceeds received on these gifted shares to their total income  declaring them as dividend income or capital gains, as the case may be and pay applicable taxes, surcharge and cess.  Thus, tax obligation shifts to parents or legal guardians of the minor child.