We the team of Taxmantra from our experience has found that, most of the taxpayers who have transferred their capital gifted assets , remain perplexed while calculating the capital gain arising on the same & whether it is long term or short term capital gain.

In the following write-up, the tax-payers may find the solution to their problems.

We all know that, any profit or gain arising on transfer of a capital asset is chargeable to tax under the head “Capital Gain”.

Transfer of gifted assets

When the capital asset became the property of the assessee in any of the manner mentioned below, the cost of acquisition of the asset shall be deemed to be the cost for which previous owner acquired it.

1. On any distribution of assets on the total or partial partition of a Hindu undivided family;
2. Under a gift or will;
3. By succession, inheritance or devolution, or
4. On any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987,
5. On any distribution of assets on the liquidation of a company, or
6. Under a transfer to a revocable or an irrevocable trust.

Also, note the following relevant points

• In such a case, previous owner in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that mentioned above.

• Where the cost of the previous owner cannot be ascertained, then the Fair Market Value (FMV) of the asset as on the date on which it became the property of the previous owner shall be the cost of acquisition (COA).

• Long term capital gain will be attracted if period of holding exceeds 12 months in case of shares, Mutual fund, UTI, Zero Coupon Bond, & Other listed securities.

• But in other assets, if period of holding exceeds 36 months, then long term capital gain will be attracted otherwise, it is Short term capital gain.

This connection can be well elaborated with an example.

Mr. A received a gift of shares of a co. from his mother on 1^st July, 2004 & the same was sold on 1^st Aug, 2004 for Rs. 50Lakhs. The mother had received the same from his husband by a way of will, which in turn was acquired by him on 1^st Jan, 1980 at a cost of Rs. 5 Lakhs.

Explain the situation.

Here in this case, for gifted assets , period of holding of Mr. A will be the period of his father who had acquired it on 1^st Jan, 1980.

Also, since the period of holding exceeds 12 months, i.e. (1980-2004), the gain arising on such transfer of shares shall be long term capital gain.