I want to gift shares held by me for last 5-10 years. Income tax rules explained

I wish to gift some of the listed shares held by for last 5-10 years to my HUF who will immediately sell them. The HUF will then buy a residential house, to be used as self-occupied for the family, investing whole of the amount received on sale of the shares. Will the capital gains earned by the HUF will be exempt so that I can bypass the clubbing provisions? 

Gifts received by an Individual or an HUF are not to be treated as income as long as aggregate of all the gifts received during the year does not exceed fifty thousand rupees. Once the aggregate of all such gifts receiving during the years crosses the threshold of fifty thousand rupees, the full value of all the gifts is treated as income without there being any basic exemption. However, gifts received from certain specified relatives are are not to be treated as income irrespective of the quantum of such gifts.  

All the members of an HUF are covered under the definition of specified relatives. So there is no tax liability for the HUF when you gift the shares owned by you to the HUF. However, income earned by the HUF will be subject to clubbing provisions and income earned from shares, be it capital gains or dividends, will be clubbed with your income.

As far as holding period for computing the nature of capital gains in case of assets received as gifts or inheritance is concerned the period for which the asset is held by the previous owner starting from the one who had paid for it has to be included for computing the period of holding for the person selling such asset. Since the holding period in the hands of the HUF will be more than 12 months for these listed shares the profits made by HUF will be long term capital gains. You will be entitled for grand fathering provisions for computation of long term capital gains as the shares were bough prior to 31st January 2018.

Since the HUF is planning to buy a residential house with the entire sale proceeds of shares the HUF would be entitled to claim exemption under Section 54 F from long term capital gains earned on sale of the shares. Whether the HUF can claim the exemption under Section 54F or not, due to applicability of clubbing provisions, may get litigated but various Income Tax Tribunals have held that the income to be clubbed would be the income computed under the provisions of the Income Tax Act. Since the income under the head capital gains can only be computed after giving effect to the exemption available under the head Capital Gains, there are fairly good chance of you winning the litigation even if the matter goes into litigation.

Since you are planning to use the house for self-occupation of the house and since there will not be any income from the house there will not be any clubbing of income as long as the house is used for self-occupation. The clubbing provisions will apply on rent as and when you let out the property or on capital gains as and when you sell it in future. The clubbing provisions will continue to apply even when one asset is converted into another asset.

Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on Twitter

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