Uncertainty Surrounds Inherited Shares: A Guide to Calculating Capital Gains and Gift Tax Implications

Calculating Capital Gains for Inherited Shares and Gifting Rules

The Ask Wallet-Wise initiative provides expert advice on personal finance and money-related queries. Readers can email their queries to [email protected], and we will attempt to get a top financial expert to address them.

A reader's query has prompted an explanation of how to calculate capital gains for inherited shares and the rules for gifting shares. The reader's wife inherited some listed shares last year and wishes to sell them through a broker but does not have the details about their cost.

Calculating Capital Gains for Inherited Shares

Read also: Correcting Credit Score Errors: A Guide to Ensuring Accurate CIBIL Reports and Optimal Loan Eligibility

When a capital asset is acquired through gift or inheritance, the cost incurred by the previous owners can be taken as the cost for the taxpayer to calculate capital gains. Listed shares are treated as long-term capital gains (LTCGs) if the scrips have been held for more than 12 months. The asset's holding period is calculated by aggregating the duration of ownership from the original purchaser through all subsequent owners to the current recipient.

Since the reader's wife does not have exact details of the cost and the date of acquisition of the inherited shares, she has the option to take the market price of these shares on January 31, 2018, as her cost for computing LTCG, including the bonus shares she has inherited. For bonus shares allotted after January 31, 2018, the cost shall be taken as nil for computing capital gains.

Gifting Rules

Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile

There are no tax implications for the reader's wife at the time of inheritance. However, if she transfers these shares to her daughter, there will not be any tax implication either, as gifts received from certain relatives, including parents, are not treated as income of the recipient. However, the daughter will have to pay capital gains tax as and when she sells the shares.

If the wife transfers these shares to her daughter, it is advisable to prepare a gift deed for the purpose of documentation. In case the daughter is a minor, the income arising on these shares will be clubbed in the hands of the parent with higher income. An exemption of up to Rs 1,500 is available for each child when the income of a minor child is clubbed.