To transfer or gift shares, you will have to convert your shares into Demat form. Read further to know the terms, procedure, and rules
In case you want to gift something new and different to your loved ones, we have got an idea. Well, you can gift your shares. It is a really productive and profitable present you can give someone. Now, of course, it is not something you can just go to the mall and grab. You need to know the entire procedure of gifting a share so that you do not mess it up.
How to Transfer or Gift Shares in Demat Form
How to Transfer or Gift Shares in Demat Form
Here’s all that you need to know to transfer or gift shares to your loved ones.
The method of gifting shares in Demat Form
The legal term for gifting of shares is the transfer of shares. The person transferring the shares is known as the ‘donor,’ and the person to whom the shares are being transferred is known as the ‘donee.’ The steps involved in the process are-
STEP 1: In order to transfer shares from the DEMAT account of the donor to the Demat account of the donee, a DIS, i.e., Delivery Instruction Slip, is to be submitted by the donor to his Depository Participant( DEMAT Account Provider). It is required to initiate an off-market transaction.
STEP 2: The following details must be mentioned on the delivery Instruction Slip:
- Donee’s name
- Demat Account Details of the Donee
- Share/Stock to be transferred
- Company’ ISIN Number
- Quantity of the Shares to be transferred
STEP 3: Not only the donor who has to do the work but the donee also has to do his/ her bit. If the donee has not given a standing receipt instruction already, he/ she is required to submit a receipt instruction to his/ her DP (DEMAT Account Provider).
STEP 4: Obviously, you do not want to struggle with tax queries or any legal issues. Therefore, you should execute a gift on a nonjudicial paper. You should ensure that you have mentioned all the necessary details of the transaction on the paper to avoid any unnecessary problems.
Recommended: What is Demat Account? The Fundamentals of Demat Account
Gifting Shares in Paper Form
Demat is not the only way by which you can transfer your shares. You can do it in the paper form as well. You need to execute and register a share transfer deed in FORM 7B. It needs to be filled and signed by the donor. Depending on which value is higher, the face value or market value of the shares on the date of the document, stamp duty is payable at the rate of 25 paise for every 100 rupees. The share transfer is completed after the deed is registered.
Two critical things that you need to keep in mind are:
- All the details of the Delivery Instruction Slip that has been submitted by the donor should completely match with the details submitted by the donee in the Receipt Instruction. If there is any discrepancy in the data provided, the share transfer shall not be done.
- To avoid the stamp value, you must convert the share certificate in Demat form.
The Tax on the Gift or Transfer of Shares
Section 56 of the Income Tax Act, 1961, governs the tax on gift or transfer of shares. The two points that are considered while computing the tax liability are:
- The gift’s receiver
- The gift amount
To make this concept clear, let us make things a bit simpler. The donee can be divided into two broad categories:
- Blood relatives
A gift to Blood Relatives
The gift is tax-free if the donee is a blood relative of the donor. The amount of the gift does not matter at all.
As per section 56(2)(vii), blood relatives include
- Donor’s spouse
- Donor’s brother or sister
- Donor’s spouse’s brother or sister
- Either of the donor’s parent’s brother or sister
- Any of the donor’s lineal ascendant or descendant
- Any lineal ascendant or descendant of the spouse of the donor
A gift to people other than blood relatives
If the donor has transferred the shares to a person other than his/ her blood relative, then the gift in excess of Rs.50,000 is taxable in the hands of the donee. The amount considered for the gift will be the fair market value of the gift. The entire gift is taxable by the donee under income from other sources, if it exceeds Rupees 50,000 in a year. However, there are situations where the gift from nonrelatives has been exempted from taxation.
For instance, in case of a wedding or any other occasion, the gift value exceeding rupees fifty thousand shall not be liable to income tax at all. Other situations in which income tax is exempted include:
- Cash lower than fifty thousand rupees
- Gift as an inheritance
- On contemplation of death of honor
- From any public charitable trust or institution
Tax on Income after the Shares have been gifted
If the shares have been gifted to the spouse, daughter in law, or minor children of the donor, it is exempted from the tax. However, the income earned from such gifts shall be added along with the income of the donor.
In case the share is transferred to a child above 18 years, he/ she will be taxed for the income earned from the gift and not the donor. For example: If you have gifted 1000 shares of a company to your spouse, there would be no tax on the gift since your spouse comes under the definition of a blood relative. But in any case, the dividend earned by the spouse shall be added with your income based on which, you will have to pay the income tax. However, if you gift the share to your child who is above 18 years, he or she will have to pay the tax by himself or herself.
It is advisable to have a thorough knowledge of the above-mentioned points before gifting or transferring shares to anyone, be it, family or strangers, to have a hassle-free process.