Can NRIs save tax by gifting shares to parents?

An NRI who gifts shares to their resident parents may not have to pay capital gains tax in India. This is because the transfer of shares by way of a genuine gift is exempt from capital gains tax under Section 47(iii) for the NRI and Section 56(2)(x) for the parents, who are considered relatives under the Act. However, this does not mean that the shares become completely tax-free.

The original purchase price of the shares remains relevant when the parents later calculate their capital gains. The parent's cost of acquisition is linked to the cost at which the NRI originally acquired the shares, not the market value on the gift date. So, the holding period for tax purposes is generally counted from the date the NRI originally acquired the shares, not from the gift date.

When the parents eventually sell the gifted shares, they will be subject to capital gains tax rules. The tax benefit, if any, will depend on the parent's overall tax position, such as the basic exemption limit, deductions, rebates, and whether the shares qualify as long-term capital gains. Furthermore, gifts to parents are not subject to the clubbing provisions that apply to gifts to spouses or minor children.

To ensure that the gift is genuinely taxable-free, the NRI should transfer ownership of the shares to the parents in their demat account and maintain proper documentation, including a gift deed, details of the shares, purchase contract notes, proof of the NRI's original ownership, records of the demat transfer, and relevant KYC and banking statements.