 "Narayan Murthy")
Infosys co-founder Narayana Murthy's recent gift of shares worth Rs 240 crore to his four-month-old grandson has sparked curiosity about the tax implications. While the act of gifting itself might not trigger an immediate tax liability for Murthy, the situation has nuances to consider. Business Standard decodes this for you
Gifts from Relatives: Generally Exempt
In India, tax law offers exemptions for gifts received from relatives. This includes grandparents, parents, siblings, spouse, children, and their spouses.
"With the Gift Tax being abolished in India, the taxation of gifts, including shares, is governed by the Income Tax Act, 1961. When a grandfather gifts shares to his grandson, it is considered a transfer without consideration, i.e., a gift. According to the Income Tax laws in India, gifts received from relatives are exempt from tax, and relatives include grandparents. Thus, if a grandfather gifts shares to his grandson, the gift of shares would not attract any income tax in the hands of the grandson at the time of receipt, regardless of the value of the shares.If shares are transferred without any consideration, the market value of those shares is considered the income of the transferor. However, the gift of the shares by a grandfather to his grandson is also exempt from this tax and not considered as transfer and hence, no capital gains would arise in the hands of the grandfather either," said Ankit Jain, Partner, Ved Jain & Associates.
Dividend earned on shares will attract tax
Also Read
The tax exemption applies at the time of receiving the gift. However, any income or gains generated from the gifted asset are subject to taxation in the hands of the recipient, the grandson in this case. This includes dividends paid by Infosys on the gifted shares or any future sale proceeds if the grandson decides to sell them.
In Narayana Murthy's case, he has transferred shares worth Rs 240 crore. The receipt of such shares will be exempt from taxation in the hands of his grandson. The gift will also not be considered as transfer and hence no capital gains would arise in Narayana Murthy's hands. However, the dividends earned on such shares would be taxed in the hands of the parent of the grandson. With a dividend yield of almost 2%, the grandson would be receiving a dividend of around Rs 4.8 crore, which would be clubbed in the hands of his father/mother.
You have to pay tax under capital gains when you sell shares to a third party
In the case of Narayana Murthy’s gifting of shares worth Rs 240 cr to his grandson, the grandson will have to pay the tax under capital gains which would be around 10 per cent, when he sells his shares to third party.
"There is no limit on such gifts within blood relation, whole of such amount is exempted, whether it is moveable or immovable. However, in cases where it is not within the blood relations, applicability on taxes for moveable and immovable will have to be calculated and paid. In case of immovable properties, any earnings made through rental, a 30 % slap rate will be added to the income of the father or mother of the grandson," said Alay Razvi, Partner, Accord Juris LLP.
Pallav Pradyumn Narang, Partner, CNK, simplifies this further:
Gifts in cash, kind, or property exceeding Rs 50,000 are generally subject to tax in the hands of the recipient as income from other sources. There are some exceptions however, these include but are not limited to gifts recieved from relatives. Relatives have been defined in the income tax act to include spouse, brother, sister and brother and sister of spouse, parents and parent-in-laws, and also includes lineal ascendants and descendants of self, spouse and any other relatives mentioned here. This definition covers grandparents as well and therefore any gifts made by Mr Murthy to his grandson will not be subject to tax in the hands of either the grandson or his parents.
There is no limit to this exemption however there exist provisions that can limit the use of this provision for the transfer of revenue-generating assets for tax mitigation purposes.
Incomes earned from such gifted assets however will be clubbed with the Incomes of the parent with higher income and taxed in their hands at the applicable rates.
Example: Mr. Ramesh, a resident Indian, gifts his son, Mr. Suresh, a sum of Rs 5,00,000 on the occasion of Suresh's wedding. As per the Income Tax Act, any gift received from a relative is exempt from tax. Relatives are defined as spouse, siblings, lineal ascendants or descendants of the individual or the spouse. Since Suresh is Ramesh's son, the gift of Rs 5,00,000 received by Suresh is completely exempt from income tax under Section 56(2)(x) of the Income Tax Act.
Gift between Non-Relatives:
Ms. Priya, a resident Indian, receives a gift of Rs. 2,00,000 from her friend, Ms. Neha, on her birthday. Since Neha is not a relative of Priya as per the Income Tax Act, the gift amount of Rs. 2,00,000 will be subject to taxation under the provisions of Section 56(2)(x) of the Income Tax Act. As per this section, any sum of money exceeding Rs. 50,000 received without consideration (i.e., as a gift) by an individual from a non-relative is considered as income and is taxable under the head "Income from Other Sources" in the hands of the recipient. Therefore, Priya will have to include the gift amount of Rs. 2,00,000 in her total income for the relevant assessment year and pay tax accordingly.
Potential tax benefits and estate planning
Gifting shares can be a strategic move for wealth distribution and estate planning
Gradual Wealth Distribution: By gifting a portion of his holdings, Narayana Murthy can gradually transfer wealth to his grandson while potentially minimizing his future tax burden on a larger estate.
Reduced tax liability on capital gains: Infosys shares, like most stocks, appreciate in value over time. If Narayana Murthy held onto the shares until his death, his estate would be liable for capital gains tax on the appreciation. Gifting the shares now allows him to potentially avoid this tax burden.
Importance of proper documentation
To ensure smooth sailing with the tax authorities, proper documentation is crucial. Murthy should have a gift deed drafted that clearly outlines the details of the share transfer, including the number of shares gifted, the value at the time of transfer, and the relationship between the donor and recipient.
