Claim LTCG exemption if receiving shares as a gift

At a recent social gathering I was introduced to Sunil. On learning that I practised as an investment adviser with expertise on tax implications of investments he requested for an opinion.

Sunil had recently bought shares in a private placement in an unlisted general Insurance company which will be going public soon. The value of the shares had already risen substantially in the private market deals that were reportedly happening. Sunil expected that the company would list at a high price and he expected to sell the stock on the stock market at a high price after completion of one year of holding. He was worried whether he would be able to claim exemption of the resulting capital gains as he had not paid securities transaction tax (STT) while purchasing the shares. He had read on the internet that exemption for long-term capital gains on sale of listed equity shares would not be available if he had not paid STT at the time of purchase.

I informed them that only a few transactions where STT had not been paid while purchasing the equity shares would be affected. This limitation had been bought in basically to check the rampant misuse of the exemption provisions for laundering of black money. The newly introduced limitation would not really affect any genuine transaction. The acquisition of unlisted equity shares (without the payment of STT) that are subsequently listed would not be affected by the new limitation.

By this time, quite a few other people had become interested in the conversation and were listening in on our discussion. Krutika who was listening in piped in. She said she had received some listed equity shares as a gift from her father a few years ago. She had naturally not paid any STT while receiving the shares as a gift. She was planning to sell them in the market and wanted to know whether the resulting long-term capital gains would be exempt from income tax. I asked her whether she knew how her father had acquired the shares. Krutika mentioned that he had acquired the shares in the company’s initial public offering (IPO). In the case of shares being received as a gift if the original owner had acquired them in an acceptable manner without the payment of STT, the exemption would hold for the current owner. Acquiring shares in an IPO does not entail payment of STT and is an acceptable manner of acquiring shares. I was glad to inform Krutika that she would be able to claim exemption of the long-term capital gains (LTCG) as and when she sold the shares in the market.

By now many people were asking questions and Mahesh asked an interesting one. Mahesh had received shares in a listed company as a part of his inheritance from his mother who had bought it in the market by paying STT. He had also received bonus shares from the company and subscribed to some shares in the rights issue floated by the company. He had thus not paid any STT on any of the listed equity shares held by him in that company. Mahesh was wondering if the treatment would be different for the shares inherited by him or the shares he had received as a result of bonus or rights issues. I informed him that as far as the shares inherited from his mother were concerned, he was okay as the original owner had paid STT on the shares and acquiring bonus or rights shares without paying STT was an acceptable manner. Again, Mahesh would be eligible to claim exemption on all the listed shares if he sold them in the market.

In short, the way the new amendment has been worded I could not envisage a genuine transaction that would be affected by it. This is one of the few times that the tax department seems to have successfully carved out non-genuine transaction from the genuine transactions.

Amendment withdrawing exemption of long-term capital gains on listed equity is very narrowly defined to avoid catching genuine transactions.

Shares bought in an unlisted company, IPO, rights issues, bonus issue, received as gift or as bonus shares are not affected by the newly-introduced limitation.

BENEFICIAL GIFTS

• Only a few transactions where STT had not been paid while purchasing equity shares would be affected
   
• If shares are being gifted to you, the exemption would hold for the current owner
   
• Acquiring shares in an IPO does not entail payment of STT and is an acceptable manner of aquisition