The Private Client team at Cyril Amarchand Mangaldas shares their comments and opinions shared in an article in the following Q&A which was published by the Mint Newspaper on 27th January, 2021 and the online edition of the same can be found here.
I wish to gift shares worth a few lakhs of rupees to my parent, who is retired and has no income, so that the dividend can be used as income. Will I need to make a gift deed and register it? Will my parent be taxed? Can my parent gift or will back the shares to me at a later date?
– S. Arora
Shares are considered as “movable property” for the purposes of the Income Tax Act, 1961, and it is not mandatory to execute a gift deed for this purpose. However, executing a gift deed will help create a legal record evidencing the transfer. You may also consider taking a simple receipt from your parent, acknowledging the transfer once complete, so your records are also complete for filing purposes.
Assuming the shares are in demat form, you will need to fill a delivery instruction slip (DIS) and submit it to the depository participant (DP). To fill the DIS, you will need to ask your parents for their DP ID, DP name and client ID. You will require these details along with ISIN (International Securities Identification Number).
The gift of shares to your parent will be tax-exempt as it would be classified as ‘property received from a relative’, which is specifically exempt on account of the proviso to Section 56 (2)(x) of the I-T Act. Upon completing the requisite transfer formalities, the gift itself is irrevocable. Once the shares reflect in your parents’ DP account, your parents will be at liberty to deal with it as they desire—including selling or onward gifting. We would recommend that your parents update their respective Wills (if already made) to reflect these shares, and then bequeath the same back to you under the said Will. Updating of the Wills should be done irrespective of any future plans that your parents may have, to avoid the shares devolving intestate in case of demise.
If the underlying objective is to put more liquidity/cash in your parents’ hands, then you can consider leaving the shares in your name, and instead gifting the dividend income or other cash owned by you, to your parents instead. This avoids any complications of having the shares transferred back to you.