Investing in stocks or other financial instruments in your name raises your tax obligation and may drive you into a higher income tax band. For greater utilization, you can take a slight detour on investments. Individuals in India can save tax in a variety of methods under various provisions of the Income Tax Act.
Giving stocks to your children and parents is one method to save money on taxes. Experts, on the other hand, advise that the gifted money be invested since it not only saves tax but also generates tax-free income under several sections of the IT laws of the country. Let us discuss how can this be done.
How can you gift shares?
You can give stocks through both online and offline methods. In any event, you should have the shares you want to give in your demat account. You have to go to your broker's desk and fill out a "Delivery Instruction Slip" if you choose the offline approach. Here, you must enter your demat information as well as the demat information of the person to whom you are presenting the shares, the stocks you wish to donate, and the amount of each.
The advantage of the offline technique is that you can send your shares to any broker, not only one with whom you already have an account. In most cases, the stocks are transferred on the same day.
How are these gifts taxed?
Gifts of more than Rs. 50,000 per year are taxed as income from other sources in the hands of the receiver at the corresponding tax rate, according to the Income Tax Act. Although, gifts from notified relatives, on the other hand, are completely excluded.
Gains from the sale of stock shares are subject to a long-term or short-term capital gains tax. However, any gain in the hands of the minor that is not directly related to the minor's activities will be added to the prior owner's income. The taxpayer is free from long-term capital gains tax up to one lakh rupees per year.
Points to Remember
- Short-term capital gains are eligible for reimbursement under section 87A of the Income Tax Act, whereas long-term capital gains are not.
- Minor children's income and profits will be included in your taxable income, therefore this method will not work for them.
This method may be used to avoid tax on short-term capital gains as well, although the maximum amount that can be saved is limited to Rs.3,33,000 in this case. In this scenario, unlike long-term capital gains, there is no one-lakh exemption, however, a rebate of Rs.12,500 is available.