For shares inherited or received as gift, how to calculate income tax on sale

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Income tax rule: For shares inherited or received as gift, the cost is also to be taken the price at which the asset was acquired by the previous owner who had actually paid for it.

Question: I had inherited 100 shares of a TCS Ltd. in 2007 from my father. The price at which he acquired these shares is not available to me. On 20-4-2009, the company issued bonus shares in the ratio of 1:1, making my total holding 200 shares. Then again on 19-4-2018, the company issued bonus shares in the ratio of 1:1 making my total holding 400 shares. I did not participate in any of the buyback of the company in the past but 50 shares under buyback in March 2022 were accepted @ ₹4,500. I have sold the balance 350 shares @ 3364 per share on 5th August 2022. How the capital gains of these shares should be computed?

Answer: There is no inheritance tax in India so there was no tax liability on you at the time of inheriting the shares. Moreover, there is no tax liability when one receives bonus shares from a company. It is only when the shares are sold, one has to pay tax either as short term capital gains or long term capital gains depending on whether the shares were held for more than 12 months or less than 12 months.

For inherited assets and those received under a gift, the holding period of all the previous owner starting from the one who had actually paid for is to be included in the holding period of the seller. For assets inherited or received as gift, the cost is also to be taken the price at which the asset was acquired by the previous owner who had actually paid for it. The cost of bonus shares received is to be taken as zero for computation of capital gains.

For assets acquired prior to 1st April, 2001 the fair market value as on 1st April 2001 is to be taken as the cost of the asset. However, in case of listed shares (whether purchased or acquired otherwise) held on 31st January, 2018 and sold after 31st March 2018, the fair market value of the shares as on 31st January 2018 is to be taken as cost in case holding period is more than 12 months.

So in respect of 200 shares (Including 100 bonus shares) held by you on 31st January 2018 the fair market value of these TCS shares on 31st January 2018 i.e. Rs. 3,112.35 per share is to be taken as cost. For the bonus shares received by you after this date i.e. on 19-4-2018 the cost shall be taken as zero.

The amount received by you in respect of 50 shares under buyback is fully tax-free under Section 10(34A) of the income tax Act as the company itself is required to pay tax on buyback. However, you need to disclose the same under the schedule EI (Exempt Income) while filing your ITR for assessment year 2022-2023.

50 shares accepted under buyback are to be appropriated from your 100 shares originally inherited applying the FIFO (First in First Out) method, out of 400 shares held on the date of buyback.

Cost of 350 shares sold now is worked out as under:

50 Shares out of holding on 31st January 2018 at FMV Rs. 3112.35 per Shares=1,55,618

100 Bonus Shares held on 31st January 2018 at FMV of Rs. 3112.35=3,11235

200 bonus shares received as bonus shares on 19th April, 2018 = Nil

Total Cost Rs. 466,853

Long term capital gains are Rs. 7,10547/- (Sale of 350 shares @ 3364-cost Rs. 466853).

The same will be taxed at flat rate of 10% without indexation after initial one lakh of long term capital gains taken together of all listed shares and units of equity oriented schemes taken together. You can claim exemption from these long term capital gains if you invest the sale proceeds for buying a residential house subject to satisfaction of prescribed conditions under Section 54F.

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