I wish to transfer some shares from my demat account to my wife’s account in an off market transaction at a no-profitno-loss basis. What will be the tax liability of the transaction?
— Amit Mahajan, Ahmedabad
There are two ways in which you can transfer your shares to your wife’s account:
I. You could gift the shares to your wife In this situation you do not have to pay any capital gains tax. This is because a gift to your spouse does not constitute a transfer as defined in the Income Tax Act and hence no capital gains tax is chargeable to the transaction.
Your wife, who receives the gift, also does not have to pay any tax since a gift received from a spouse does not attract any income tax. However, any profit generated from the shares in future will be clubbed with your income for the year and will be taxed at your marginal rate of tax.
II. You could transfer the shares against payment Since the transfer will be offmarket and securities transaction tax will not be paid, the payment received by you will be subject to capital gains tax.
You can’t escape this by stating that the transfer was on a no-profit-no-loss basis. The profit (or loss) from the transaction would be calculated by taking into account the price at which you acquired the shares and the closing price of the shares on a recognised stock exchange on the date they were transferred to your wife’s account. The transfer of shares that were purchased by you less than a year ago will attract short-term capital gains tax, which will be charged at your marginal rate of tax. The transfer of shares that were purchased by you more than a year ago will be charged at 10% flat or 20% after indexation, whichever is more beneficial for you.
I wish to invest in stocks in my wife’s name. Will she have to pay tax if the income from investments exceeds Rs 1.45 lakh in a year?
— Virat Shah, Vadodara
The income from investments you make in your wife’s name will not be treated as her income but will be clubbed with your income and you will have to pay tax on it. Here again, if the shares are held for over a year and sold through a recognised stock exchange, the profits will be tax free. In case they are sold within a year of purchase, the profit will be taxed at 10%.
This year’s budget has proposed to raise the capital gains tax on short term gains from equities to 15%. But that would come into effect from 1 April 2008.
However, while the income from the investment is to be clubbed with the earnings of the giver, any income earned on the income is not. That is treated as the independent income of the recipient and the tax liability is also hers.
She will have to pay tax if this income exceeds Rs 1.45 lakh a year. From next year, this tax-free limit for women would be Rs 1.80 lakh a year.
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