How to Save Tax by Gifting Shares to Parents or Spouse ?

Gifting shares is often seen as a family or estate-planning decision. But when done with proper understanding of tax laws, it can also become a legitimate tax-planning tool. Many investors, however, make mistakes by ignoring clubbing of income rules, which can wipe out the intended benefit.

Let’s understand when gifting shares helps save tax, when it doesn’t, and how to do it correctly.

Is Gifting Shares Legal in India?

Yes. Under Indian tax laws, gifting shares to relatives such as:

• Parents
• Spouse
• Children

is completely legal and tax-free at the time of transfer.

As per Section 56(2)(x) of the Income Tax Act, gifts received from specified relatives are not taxed in the hands of the recipient.

What Happens to Tax After the Gift?

This is where things get interesting.

While the gift itself is tax-free, income generated from those shares (dividends or capital gains) may or may not be taxed in the recipient’s hands, depending on who you gift the shares to.

Gifting Shares to Parents: A Smart Tax Strategy

Why It Works

• Parents are not covered under clubbing provisions
• Any income earned from gifted shares is taxed in the parents’ hands

If your parents fall under a lower tax slab, this can significantly reduce the overall family tax burden.

Example

• You gift shares worth ₹5 lakh to your retired father
• He sells them after a year and earns ₹1 lakh as long-term capital gains
• If his total income is below the taxable limit, no tax may be payable

💡 This makes gifting to parents one of the most effective and legal tax-saving methods.

Gifting Shares to Spouse: Beware of Clubbing Rules

This is where many people go wrong.

Clubbing of Income (Section 64)

If you gift shares to your spouse:

• Dividends and capital gains are clubbed back to your income
• Tax is paid by you, not your spouse

What This Means

• No tax saving on regular income
• Your tax slab continues to apply

👉 Gifting to a spouse does not help in tax saving, unless specific planning is done.

When Can Gifting to Spouse Still Work?

There are limited scenarios where gifting to a spouse may still make sense:

• Gifting shares bought from your spouse’s own funds
• Transfers made as part of a court-approved settlement
• Reinvestment of gifted proceeds into assets generating exempt income

These cases require professional tax advice.

Capital Gains Calculation After Gifting

When the recipient sells the gifted shares:

• Purchase price = Original cost paid by the giver
• Holding period = Includes the period for which the giver held the shares

This rule applies whether the gift is made to parents or spouse.

Documentation Is Important

Always maintain:

• Gift deed (simple notarised format is sufficient)
• Demat transfer proof
• Relationship proof (if required)

This avoids questions during scrutiny or notice.

Key Takeaways

• Gifting shares to parents can legally reduce tax
• Gifting shares to spouse triggers clubbing of income
• Gift itself is tax-free, but income may not be
• Proper documentation is essential
• Long-term planning works better than short-term gifting

FAQs:

1. Is gifting shares taxable in India?

No. Gifts to specified relatives are tax-free.

2. Can I gift shares to my retired parents?

Yes, and income from those shares will be taxed in their hands.

3. Does gifting shares to spouse save tax?

Generally no, due to clubbing of income rules.

4. Is a gift deed mandatory?

Not mandatory, but strongly recommended for records.

5. Does holding period reset after gifting?

No. The original holding period continues.