Why a Taxpayer Will Not Get the ₹1.25 Lakh Exemption on Selling Gifted Shares
A common query among taxpayers involves the sale of gifted shares and the eligibility for capital gains tax benefits. While it’s often assumed that the ₹1.25 lakh exemption on long-term capital gains (LTCG) under Section 112A is straightforward, a critical condition can lead to its denial.
Let’s examine a real-life scenario to understand why. A taxpayer sold shares gifted by their father, realizing a long-term capital gain of ₹3,00,000. The taxpayer believed they were eligible for a ₹1.25 lakh exemption, with the remaining gain of ₹1,75,000 being taxed at a concessional rate of 12.5%. Their accountant, however, advised them that they would not receive this benefit.
The taxpayer argued that their father had paid the Securities Transaction Tax (STT) when he originally acquired the shares, but this is only half the story.
The Crucial Rule of Section 112A
To avail the ₹1.25 lakh exemption and the 12.5% concessional tax rate on LTCG from equity shares under Section 112A of the Income Tax Act, two conditions regarding STT must be fulfilled:
- STT must have been paid at the time of acquisition (the purchase of the shares).
- STT must also be paid at the time of transfer (the sale of the shares).
Why the Exemption Was Denied
In this case, while the father met the first condition by paying STT on the purchase, the taxpayer failed to pay STT on the sale of the shares.
Because STT was not paid at the time of the sale, the taxpayer is ineligible for the benefits of Section 112A. The entire capital gain of ₹3,00,000 will be added to their income and taxed at their normal income tax slab rate, rather than the expected 12.5% on a reduced amount.
Key Takeaway:
When dealing with gifted shares, remember that the tax treatment depends on the actions of both the giver and the recipient. The payment of Securities Transaction Tax (STT) is mandatory at both the time of acquisition and sale to claim the ₹1.25 lakh exemption and the concessional tax rate. Simply inheriting a past STT payment is not enough.