The Supreme Court recently ruled that shares within the lock-in period are not ‘quoted shares’, and thus they need to be valued as ‘unquoted shares’ to determine the gift tax liability.

What are quoted and unquoted shares?

• According to the Wealth Tax Act, ‘quoted share’ in relation to an equity share or a preference share means a share quoted on any recognised stock exchange with regularity from time to time.
• The quotations of such shares are based on current transactions made in the ordinary course of business.
• An ‘unquoted share’ is simply a share that is not a quoted share.
• So according to the SC order, if the locked-in shares of the promoter falls in the ‘unquoted share’ category, their price treatment can’t be that of the ‘quoted shares’, and so gift tax will not be applicable.

What are Gift Taxes?

• Gift tax is a provision introduced by the Parliament of India in 1958.
• It was introduced to impose tax on giving and receiving gifts under certain circumstances which is specified under the act.
• These gifts can be in any form including cash, jewellery, property, shares, vehicle, etc.

Gift Tax on Transfers

• The gift tax is also applicable on certain transfers that is not considered as a gift.
• The transfer of existing movable or immovable property in money or money’s worth qualifies for gift tax.

Certain exemptions

• Though gift tax is applicable on gifts whose value exceeds Rs.50,000, the gift is exempted from tax if it was given by a relative.
• The income tax rule specifies who can be considered as a relative and the list is mentioned below.

1. Parent
2. Spouse
3. Siblings
4. Spouse’s siblings
5. Lineal descendants
6. Lineal descendants of the spouse

Listed below are other situations in which the gift will be exempted from tax.

1. Gifts received during weddings are usually exempted from tax.
2. Gifts received as part of inheritance is exempted from tax.
3. Cash or rewards received by local authorities or educational institutions on the basis of merit is exempted from tax.

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