Are Business Assets Gifted to Children Subject to Taxation?

Gifting business assets (such as shares in a company, real estate, or other business property) to children can have significant tax implications under Indian tax laws. While there is no gift tax in India, such transfers may still be subject to capital gains tax or other taxes depending on the nature of the gift and how it is transferred.

Tax Treatment of Business Assets Gifted to Children:

Gift Tax Exemption for Family Transfers:

Under Section 56(2) of the Income Tax Act, gifts received from relatives (including children, parents, spouse, etc.) are exempt from gift tax. Therefore, if business assets like shares or property are transferred from a parent to a child, there will be no gift tax applicable.

The transfer of business assets to children, such as shares in a private or public company, would not be taxable as a gift, regardless of the value of the assets, as long as the gift is made between family members.

Capital Gains Tax on Sale of Business Assets:

While there is no gift tax, capital gains tax may be applicable when the gifted business assets are later sold.

The cost of acquisition of the business assets for the recipient (i.e., the child) is considered the same as the donor's cost of acquisition (the parent's cost of acquisition).

For example, if a parent gifts shares in their business to their child, the child will inherit the cost of acquisition of those shares as per the parent's original purchase price.

Short-Term vs Long-Term Capital Gains Tax:

If the gifted business asset is sold within 36 months of receiving it, the capital gains are considered short-term capital gains (STCG), and are taxed at 15% if the asset is listed on a stock exchange (or other applicable rates depending on the asset type).

If the asset is sold after 36 months, the capital gains are considered long-term capital gains (LTCG), and if the gain exceeds Rs. 1 lakh in a financial year, it is subject to a 10% tax without indexation benefits.

Dividend Income from Business Assets:

If the gifted business asset generates income, such as dividends from shares or rental income from business property, this income will be taxable in the hands of the recipient (the child) as per their income tax slab.

Specific Rules for Business Assets:

In case of a family-owned business or partnership, gifting the ownership interest (shares or partnership interest) might involve transfer of business control. If the gift includes control over a business, there may be additional considerations, such as the potential impact on management or succession planning.

For real estate used in the business, gifting it to children may attract capital gains tax when the property is sold, based on the holding period of the asset.

Income from Sale of Gifting Business Shares:

If the shares of a private limited company are gifted to a child, and those shares are later sold, the resulting capital gains will be taxed based on the sale price and the original acquisition cost. The taxation will depend on whether the shares are short-term or long-term.

Exemption for Transfer of Agricultural Land or Business Assets in Certain Cases:

In the case of agricultural land or certain types of assets, exemptions or reduced tax rates may apply under specific circumstances. If the business property is agricultural or used for a particular purpose, the child may be eligible for tax exemptions.

Example:

Example 1: Gift of Shares in a Family Business

A parent gifts 1,000 shares in their family-owned company to their child. The cost of acquisition for the parent was Rs. 50 per share, and the market value of the shares is Rs. 200 per share at the time of the transfer.

There is no gift tax because the gift is from a parent to a child.

If the child later sells the shares for Rs. 300 per share, the capital gains tax will be calculated on the difference between the selling price (Rs. 300) and the parent’s cost of acquisition (Rs. 50), i.e., Rs. 250 per share.

Example 2: Gift of Commercial Property

A parent gifts a commercial property (valued at Rs. 50 lakh) to their child. The parent originally purchased the property for Rs. 20 lakh.

There is no gift tax on this transfer because it is a family gift.

If the child later sells the property for Rs. 60 lakh, the capital gains tax will be applicable, and the capital gain will be the difference between the selling price (Rs. 60 lakh) and the original purchase price (Rs. 20 lakh).

Example 3: Dividend from Business Assets

A parent gifts shares in their family business to their child. The company distributes dividends of Rs. 1 lakh.

The dividend income will be taxable in the hands of the child, according to their individual income tax slab.

Conclusion:

Business assets gifted to children are not subject to gift tax if transferred between family members. However, capital gains tax will apply when the child sells the gifted assets, based on the holding period (short-term or long-term) and the cost of acquisition inherited from the donor. Additionally, any income generated from these assets, such as dividends or rent, will be taxed in the hands of the child. Understanding the tax treatment of business asset transfers can help in effective estate planning and tax strategy for family businesses.