Tax Rules: What happens if spouses gift shares to each other? Is tax applicable? Pay special attention to these ITR rules.

Tax Rules: Gifting money or shares between spouses is common. Many people transfer shares to their life partners for tax planning or investment purposes. However, it is crucial to understand income tax regulations before doing so. While gifting shares often does not attract tax at the time of transfer, the income generated from them may be taxable.

Is tax applicable on gifting shares?

If a husband gifts shares to his wife (or vice versa), no tax is levied at the time of the share transfer. Under income tax laws, gifts exchanged between spouses are considered tax-free. However, this does not mean that all future income generated from these shares will also be exempt from tax.

Clubbing rules apply to income

If the gifted shares yield dividends or result in capital gains upon sale, the 'clubbing provisions' of the Income Tax Act may apply in certain cases. This means the income generated from the gifted shares could be added to the income of the person who originally gifted them. In other words, the tax liability could fall on the donor. For instance, if a husband gifts shares to his wife and income is earned from them, that income might be added to the husband's taxable income.

What should be kept in mind while filing ITR?

If you have gifted shares to your spouse, there are a few important things to consider when filing your Income Tax Return (ITR):

Maintain a record of the share gift
Draft a Gift Deed
Keep track of capital gains upon the sale of shares
Check clubbing rules
Consult a tax expert
Delhi residents: Names will not be removed from the voter list; provide correct information to the BLO and keep these documents ready for verification.

Will future profits also be subject to clubbing? If the initial income generated from gifted shares is reinvested to yield further earnings, the "clubbing of income" rules do not necessarily apply; in other words, the subsequent income may be taxed differently.

Haste to Save Tax

Many people transfer shares to their partner's name solely to save on taxes. However, doing so without understanding the regulations can lead to tax notices or additional tax liabilities later on. Therefore, it is essential to thoroughly understand the tax rules before making any significant investment or transfer.