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Daughter will be liable to pay LTCG tax if gifted shares are sold after a year

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My father and mother bought shares of blue-chip firms before 1994, some of them in jointly and others individually. My father died in 1994. Shares held by my father and those jointly held were transferred to my mother by 2002. The rest, including bonus shares, were transferred by 2019. These shares were gifted to my daughter, via a delivery instruction slip in June 2019, who in turn sold them in December 2020. How to calculate capital gains tax? Will grandfathering clause (of 31 January 2018) be applicable?

— Satya Nand

It is assumed that your daughter is a major in the fiscal year the shares are sold. As the shares were held by your daughter and your parent(s) cumulatively, for more than 12 months, the asset shall be considered as long-term capital asset and the gains arising out of the sale would be taxable as long-term capital gains (LTCG) in your daughter’s hands.

LTCG from sale of listed shares is calculated as the difference between net sale consideration (actual sale consideration less brokerage and incidental expenses) and the prescribed cost of acquisition. Since the shares were transferred to your daughter via gift/inheritance, the actual cost of acquisition for your daughter will be the cost to the original owner. As the shares were acquired prior to 1 April 2001, the cost of these shares can be substituted with the fair market value (FMV) as on 1 April 2001, at the option of the assessee. Further, the cost for the purpose of computation of LTCG from sale of listed shares shall be the highest listed price as on 31 January 2018 (in place of the cost referred to above), provided the listed price as on such date, is lesser than the sale value. However, where the sale value is less than the listed price, the cost for the purpose of computation of LTCG, shall be sale value or cost referred to above, whichever is higher.

The resultant LTCG to the extent it exceeds the overall limit of 100,000 per annum is taxable in your daughter’s hands at 10% plus applicable surcharge and cess. Your daughter can seek a roll over exemption against this LTCG under Section 54F of the Act by purchasing or constructing a residential house property in India, subject to the prescribed conditions and timelines.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at [email protected]

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