The transfer of shares by Infosys founder Narayana Murthy to his grandson, valued at Rs. 240 crores, garnered great nationwide attention. What made this transfer remarkable was not only the substantial value of the shares.
The entirety of the transferred shares came directly from Narayana Murthy’s holdings. The transaction, conducted through an ‘off-market’ process, captured widespread interest due to its unusual nature and the substantial wealth involved.
How Infosys Founder Share Transfer to Grandson became ‘Tax Free’
When you sell your stock or shares for a profit, a Capital gains tax is the tax levied on the profit earned from selling assets. It can be either Long- Term Capital Gain ( LTCG ) or Short – Term Capital Gain ( STCG ).
In this situation, the transfer of shares constitutes a ‘Gift,’ where no consideration is exchanged. Here, the sender of the gift is ‘Grandfather’ i.e., a relative of the receiver. According to Section 56(2) of the Income Tax Act, 1961, gifts given to relatives are exempt from taxation.
Therefore, if a grandfather decides to transfer his shares as a gift to his grandson, it falls under the category of a gift and cannot be taxed as income under the Income Tax Act in the hands of the grandson. Furthermore, since it is a gift without consideration, Mr. Narayana Murthy is not liable to pay capital gains tax on the transfer.
Dividend Income Tax on Grandson
While the shares gifted are not taxable at the time of transfer, any dividends earned from such shares are subject to taxation. However, it’s important to note that the dividends earned on these gifted shares would be taxed in the hands of the parent of the grandson as he is just 4 months old. That is clubbing of income which is specified in the Section 64 of the Income Tax Act.
When the gift receiver wants to sell the gift in future, then the same would be taxable as capital gain tax.
Capital Gain Tax on Share Selling To a Third Party
In the given scenario, where shares are gifted to the grandson, tax exemptions apply. However, if you opt to sell your shares to a third party, different tax implications come into play. Shares held for less than one year before being sold result in short-term capital gains ( STCG ). STCG is taxed at your applicable income tax slab rate, without any exemption.
If you held Shares for more than one year qualify for long-term capital gains treatment. As per recent changes in Indian tax laws, LTCG on listed equity shares and equity-oriented mutual funds exceeding Rs. 1 lakh in a financial year are taxed at 10%, without the benefit of indexation.
Concerned Income Tax Provisions
Section 56(2) : According to the Section 56(2) of the Income Tax Act, the gifts transferred between relatives are not taxable. The relatives include the spouse, siblings, the siblings of the spouse, siblings of either parent, any blood related or offspring ..etc.
Section 64 : This section empowers the clubbing of income of certain persons with that of their spouses, minor child, etc. Naryana Murthy’s grandson’s dividend income will be clubbed with his parents as he is a minor child.
So, if you are planning to send such gifts to your close relative, then don’t be worried, you will not be taxed immediately. The sender of the gift will have no implication, however, the receiver of the gift has to pay the tax in future if he earns income from such gifts. And one more thing to remember is, if the receiver sells that gift to some third party, then you have to pay capital gain tax.
What if the gift is received from someone who is not a relative? In such instances, if the value of the gift exceeds Rs. 50,000, it becomes subject to taxation.
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