COURTKUTCHEHRY SPECIAL REPORT
Capital Gains and Gifting in India: What Taxpayers Must Know to Avoid Surprises
Gifts from relatives are tax-free, but selling gifted assets attracts capital gains tax
Know the rules under Section 56 and Section 45 to protect your wealth and stay compliant
By Our Legal Reporter
New Delhi: December 13, 2025:
Gifting is a common practice in India, often driven by love, family bonds, or financial planning. But when it comes to taxes, gifts are not always free of obligations. Recent discussions around gifting mutual fund units to family members have raised questions about whether such transfers can help save capital gains tax. The answer lies in understanding capital gains laws and gifting provisions under the Income Tax Act.
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This article explains the rules in simple terms, highlights what is taxable and non-taxable, and offers practical advice for taxpayers.
Capital Gains Tax in India
Capital gains are profits earned from selling a capital asset such as property, shares, mutual funds, or gold. The Income Tax Act divides capital gains into two categories:
- Short-Term Capital Gains (STCG):
- For property: if held less than 3 years.
- For listed shares/mutual funds: if held less than 1 year.
- Taxed at slab rates (property) or 15% (listed shares/mutual funds).
- Long-Term Capital Gains (LTCG):
- For property: if held more than 3 years.
- For listed shares/mutual funds: if held more than 1 year.
- Taxed at 20% with indexation (property, gold) or 10% above ₹1 lakh (shares/mutual funds).
Important: When an asset is gifted, the recipient does not pay tax at the time of receiving it. But when they sell it, capital gains tax applies. The cost of acquisition is considered the original purchase price paid by the giver, and the holding period includes both givers and recipient’s time.
Gifting Laws in India
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The Income Tax Act, under Section 56(2)(x), governs taxation of gifts.
- Tax-Free Gifts:
- Gifts from relatives (spouse, parents, siblings, children, grandparents, etc.).
- Gifts received on marriage.
- Gifts received through inheritance or will.
- Gifts received from local authorities or registered charitable trusts.
- Taxable Gifts:
- Gifts from non-relatives exceeding ₹50,000 in a financial year.
- Immovable property received without consideration or at undervalued price.
- Movable property (like shares, jewellery) received from non-relatives above ₹50,000.
Thus, gifting mutual fund units to close family members is not taxable at the time of transfer, but capital gains tax will apply when the recipient sells them.
Example: Gifting Mutual Fund Units
Suppose Mr. A invested ₹5 lakh in mutual funds in 2020. By 2025, the value grew to ₹10 lakh. He gifts the units to his daughter.
- At the time of gift: No tax, since daughter is a relative.
- When daughter sells: If she sells for ₹12 lakh, capital gains = ₹12 lakh – ₹5 lakh (original cost).
- Holding period includes Mr. A’s time, so if total holding exceeds 1 year, it qualifies as LTCG.
This shows that gifting does not erase capital gains liability; it only shifts it to the recipient.
Smart Gifting Strategies
Tax experts suggest lawful ways to reduce tax liability through gifting:
- Gifting to family members in lower tax brackets: For example, gifting mutual fund units to a parent with no other income.
- Timing the sale: If the recipient holds the asset longer, it may qualify for LTCG, which has lower tax rates.
- Using exemptions: Certain gifts, like those received on marriage or inheritance, remain tax-free.
However, these strategies must comply with the law. Misuse can attract scrutiny from the tax department.
Dos and Don’ts for Taxpayers
Do’s:
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- Keep documentation of gifts (gift deed, transfer records).
- Declare capital gains correctly when selling gifted assets.
- Use exemptions under Section 10 and Section 56 wisely.
- Consult a tax advisor for large transactions.
Don’ts:
- Don’t assume all gifts are tax-free.
- Don’t ignore capital gains liability after gifting.
- Don’t undervalue property transfers to avoid tax.
- Don’t exceed ₹50,000 in gifts from non-relatives without declaring.
Broader Implications
The gifting and capital gains rules balance family traditions with tax compliance. They ensure that genuine gifts among relatives remain tax-free, while preventing misuse through non-relative transfers. For investors, understanding these laws is crucial to avoid surprises and plan wealth transfers effectively.
📝 Quick Checklist: Tax-Free vs Taxable Gifts in India
✅ Tax-Free Gifts
- Gifts from relatives (spouse, parents, siblings, children, grandparents, grandchildren).
- Gifts received on marriage.
- Gifts received through inheritance or will.
- Gifts from local authorities.
- Gifts from registered charitable trusts or institutions.
❌ Taxable Gifts
- Gifts from non-relatives exceeding ₹50,000 in a financial year.
- Immovable property received without consideration or at undervalued price.
- Movable property (shares, jewellery, mutual funds, etc.) received from non-relatives above ₹50,000.
💡 Capital Gains Reminder
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- Receiving a gift is not taxable (if from relatives or exempt categories).
- Selling a gifted asset is taxable.
- Capital gains are calculated using the original purchase price and holding period of the giver.
📌 Do’s and Don’ts for Taxpayers
Do’s:
- Keep a gift deed or documentation for proof.
- Declare capital gains correctly when selling gifted assets.
- Consult a tax advisor for large transactions.
Don’ts:
- Don’t assume all gifts are tax-free.
- Don’t ignore capital gains liability after gifting.
- Don’t exceed ₹50,000 in gifts from non-relatives without declaring.
Conclusion
Gifting is a beautiful tradition, but in India it comes with tax rules. Gifts from relatives are tax-free, but selling gifted assets attracts capital gains tax. Gifts from non-relatives above ₹50,000 are taxable.
By knowing the laws under Section 56(2)(x) and capital gains provisions under Section 45, taxpayers can plan better, avoid disputes, and protect their wealth.
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