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# Tax on Gifting & Inheriting Unlisted Shares
Unlisted shares often move within families — parents gifting to children, shares passing on through a will, founders transferring stakes to relatives. Each of these has distinct tax consequences, and the rules differ depending on whether the transfer is a gift during lifetime or an inheritance on death.
This article covers both: when a gift of unlisted shares is taxable, who is exempt, and how the original cost and holding period carry over to the new owner.
Disclaimer: This is general educational content, not tax advice. Gift and inheritance situations are fact-specific, and documentation matters a great deal. Consult a chartered accountant before acting on a specific transfer.
Two Separate Taxes to Keep Apart
There is no longer any standalone "gift tax" or "estate duty" in India. Instead:
- A gift of unlisted shares can be taxed in the recipient's hands under Section 56(2)(x) as income from other sources.
- A later sale of the gifted or inherited shares triggers capital gains tax, using the carried-over cost and holding period.
Inheritance on death is itself not a taxable event — neither for the estate nor the heir. Tax only arises when the heir eventually sells.
When a Gift of Shares Is Taxable — Section 56(2)(x)
If you receive unlisted shares without consideration (a pure gift) and the aggregate fair market value of property received without consideration in the year exceeds ₹50,000, the entire FMV is taxable as income from other sources.
If you receive shares for inadequate consideration (you pay less than FMV), and the shortfall exceeds ₹50,000, that shortfall (FMV minus what you paid) is taxable.
The FMV of unlisted shares for this purpose is computed under Rule 11UA — broadly a net-asset-value based valuation. (See our separate article on Rule 11UA and Section 56(2)(x).)
The Relative Exemption
Section 56(2)(x) does not apply if the gift comes from a relative, as specifically defined. The exemption is unlimited — there is no value cap when the donor is a relative. Defined relatives include:
- Spouse.
- Brother or sister, and their spouses.
- Brother or sister of either parent (uncles and aunts by blood).
- Any lineal ascendant or descendant (parents, grandparents, children, grandchildren), and their spouses.
- Any lineal ascendant or descendant of the spouse, and their spouses.
Gifts are also exempt when received:
- On the occasion of the recipient's marriage.
- Under a will or inheritance.
- In contemplation of the death of the donor.
Note that cousins, friends, and most distant relations are not "relatives" for this purpose — a gift of unlisted shares from them above ₹50,000 FMV is taxable in your hands.
Clubbing — A Trap for Spouse and Minor Gifts
Even where the gift itself is exempt, clubbing provisions under Section 64 can attribute future income to the donor:
- Shares gifted to a spouse or minor child: any capital gain on their later sale may be clubbed back into the donor's income.
- This does not change who owns the shares, but it changes whose return reports the gain.
This is a frequent surprise in family transfers and should be planned for explicitly.
Cost Basis for Inherited and Gifted Shares — Section 49(1)
When shares pass by gift, will, or inheritance, Section 49(1) says the recipient's cost of acquisition is the cost to the previous owner. You do not get a fresh "stepped-up" cost equal to the value on the date of transfer.
- If the previous owner acquired the shares before 1 April 2001, you may substitute the FMV as on 1 April 2001 as the cost.
- Any cost of improvement incurred by the previous owner also carries over.
### Worked Example
- Your mother bought unlisted shares in 2015 for ₹2 lakh.
- She gifts them to you in 2024. You sell them in 2025 for ₹10 lakh.
- Your cost of acquisition is ₹2 lakh (her cost), not the 2024 value.
- Capital gain = ₹10 lakh − ₹2 lakh = ₹8 lakh.
Holding Period Carries Over Too
For these transfers, the previous owner's holding period is included in yours when deciding short-term versus long-term. This is one of the most valuable features of the rules.
- Mother held the shares from 2015 to 2024 (long-term).
- You sell within a few months of receiving them in 2024.
- Because her period is added, the combined holding far exceeds 24 months — so your gain is long-term, taxed at the concessional LTCG rate (12.5% under the post-23 July 2024 regime) rather than at your slab rate.
Without the carry-over, a quick post-gift sale would have looked short-term.
Documentation to Keep
- A gift deed (for lifetime gifts) clearly identifying the shares, donor, and donee.
- Proof of the donor's original cost and date of acquisition.
- The will, succession certificate, or probate for inherited shares.
- Demat transmission/transfer records showing the change of ownership.
- A valuation under Rule 11UA where a taxable gift is involved.
*Published by the Polemarch editorial team. Not tax advice — consult a chartered accountant.*