Gift of securities

Give someone shares worth a lakh of rupees for nothing, and the taxman treats it as their income, not a private family matter. The workbook calls this gift of securities, and it sits inside the "Income from Other Sources" chapter for exactly that reason.

The rule covers two situations: getting shares without paying anything, and getting shares for less than they are worth. Both are taxable in the hands of the person who received them, once the numbers cross a threshold.

Received without consideration. If the total fair market value of shares and securities received free, across the year, exceeds Rs 50,000, the whole fair market value is taxable — not just the amount above Rs 50,000.

Received for inadequate consideration. If shares are bought below fair market value, the difference between fair value and the price actually paid is taxable, again only once the aggregate difference for the year exceeds Rs 50,000.

How fair market value is found. Rule 11UA of the Income Tax Rules, 1962 sets out separate methods for quoted and unquoted shares.

When it is not taxed at all, regardless of value: a gift received on the occasion of the marriage of the recipient (the workbook's words are the marriage of the individual — it is the receiver's wedding that exempts the gift, not the giver's), under a Will or inheritance, in contemplation of the donor's death, from a local authority, from certain registered trusts, funds or educational and medical institutions, or from a specified relative.

Who counts as a relative. For an individual, the Act's own list runs from spouse, children (including step and adopted), parents and step-parents, siblings including half-siblings, grandparents and great-grandparents, down to a father's or mother's brother or sister — each with their spouse. It stops short of cousins, nephews, nieces and step-siblings, who are not treated as relatives for this rule. For a Hindu Undivided Family, every member counts as a relative.

Mr Desai, resident in India, receives 500 shares of an unquoted company as a gift from a family friend, with a fair market value under Rule 11UA of Rs 400 per share — Rs 2,00,000 in total. A family friend is not on the Act's relative list, and Rs 2,00,000 comfortably exceeds Rs 50,000, so the entire Rs 2,00,000 is taxable as income from other sources, at his slab rate.

Had the same friend instead sold him the shares for Rs 1,50,000 rather than gifting them outright, the taxable amount would be only the shortfall: Rs 2,00,000 − Rs 1,50,000 = Rs 50,000, still crossing the threshold and still fully taxable, because the aggregate difference test looks at the shortfall, not the price paid.

Had the gift instead come from his father's brother — a relative on the Act's own list — no tax would arise at all, whatever the value.

Chapter 9 (Income from Other Sources), sections 9.4 to 9.4.3, sets out this entire rule: the Rs 50,000 threshold, the Rule 11UA valuation method, and the specified-event and specified-relative exemptions. Expect a computation question applying the Rs 50,000 aggregate test, and a question testing which of a list of relatives is, or is not, exempt.

• Cross Rs 50,000 and the whole amount is taxed, not just the excess. This is a slab test, not a marginal one.
• Cousins, nephews, nieces and step-siblings are not relatives for this rule, however close the real relationship — this is the most commonly missed exclusion.
• A gift in contemplation of the donor's death is exempt, distinct from a gift merely made while the donor happens to be unwell.
• For an HUF recipient, every member of the HUF counts as a relative — the detailed individual list does not apply.
• The Rs 50,000 test is an annual aggregate across all such gifts, not a per-gift or per-donor threshold.