Income on gift taxable to the person giving the gift

POSTED BY Reena ON December 4, 2012 9:14 am COMMENTS (5)

Hi,

If Mr. X transfers an amount every month in his brother’s account and the brother invests that amount in shares. He sells some shares in less than one year of buying the shares and the others after one year completes.

My understanding is that, the profit on the shares sold in less than one year is taxable to Mr. X and there is no tax implication to anyone related to the investment in shares for more than one year.

Is that correct?

Thanks.

 

5 replies on this article “Income on gift taxable to the person giving the gift”

  1. bemoneyaware says:

    Reena sorry for delay in replying.(i was under the impression that reply will send a mail hence was waiting for it)
    As far as I know as both of you are major no clubbing of income will be applied, hence your brother will be liable to pay tax on profit i.e short term capital gain
    It happens only in case of spouse where clubbing of income exists.

  2. Reena says:

    Thanks for the reply, bemoneyaware. The reference that you have mentioned talks about the tax on money received from a relative. My query is about tax on income (profit) from that money. Is there any reference that talks about that? I remember having read somewhere that the person who is gifting would be accountable for the tax on profit from the money received by a relative. Both are major.

  3. bemoneyaware says:

    If your brother is major than he else clubbing of income will come into play.
    For you reference A similar question was asked on livemint
    My mother gifted me `80 lakh for my house. Is this amount taxable?
    Quoting from it:
    Under section 56 of the Income-tax Act, any money received by an individual from any person during any fiscal without consideration, the aggregate value of which exceeds `50,000, is taxable under “income from other sources”. However, an exemption is available if the money is received from a relative, which includes, among others, any lineal ascendant or descendant of the individual. Accordingly, the money received by you from your mother shall not be taxable in your hands.
    You may consult a lawyer for the documentation with respect to the gift transaction.

  4. Reena says:

    Thanks for the response, bemoneyaware. It helps. If the investment is in the brother’s name, who will pay the tax for short term capital gain.

  5. bemoneyaware says:

    There are two parts of questiom:
    1. Tax or Capital gain on shares
    2. Who pays tax on profit.

    Tax/Capital gain on shares:
    For Stocks with STT paid
    Short Term Capital gain if Sold before 1 year ,Taxed at 15%.
    Long Term Capital gain if solf after 1 year Tax free.

    So as you rightly pointed out profit on the shares sold in less than one year is taxable and there is no tax implication to anyone related to the investment in shares for more than one year. Our article Basics of Capital Gain discusses it in detail.

    Second part:Who pays tax for short term capital gain.
    Typically tax depends on source of income. before we answer second question need to
    know:
    1. Investment is in whose name – Mr X or brother (assuming brother is not a minor)
    2. Amount invested

    If brother then his income cannot be clubbed with Mr.X
    In the provision introduced in Section 56 of the Income Tax Act, if any sum of money is received gratis by an individual or Hindu Undivided Family (HUF) during any year, it shall not be taxable if from a relative.
    The term ‘relative’ has been defined in the law to include 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 ascendants or descendents of the individual, any lineal ascendants or descendents of the spouse of the individual, and spouses of all of the persons mentioned above.
    For details Check out Gifts from relatives are Tax-Exempt

    Hope it helped!

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