Gifts are a beautiful way to show love, celebrate milestones, or simply remind someone they matter. While chocolates, toys, clothes, sweets or gadgets bring smiles, they often fade, break, or lose value over time. But what if you could give a gift that grows in value, teaches lifelong skills, and secures a loved one’s future? Gifting shares or ETFs (Exchange-Traded Funds) is a powerful, forward-thinking alternative to traditional presents.
It’s not just a gift; it’s a legacy of financial wisdom, ownership, and security. Not only does this offer a financial head start, but it also imparts valuable lessons about the world of investing.
Gifting shares or ETFs is more than just a modern twist on an age-old tradition; it is a thoughtful gesture aimed at securing a stable financial future. By choosing this type of gift, you are not merely giving an object that will eventually lose its novelty; you are offering a potential asset that may grow over time, thereby instilling the foundations of financial literacy and responsible money management.
In this blogpost, we will delve into the benefits of gifting shares and ETFs, how they serve as an introduction to investing, and the tax implications one should be aware of in India.
Table of Contents
Key Benefits of Gifting Shares and ETFs
1. Embracing Financial Education Through Gifting
One of the most significant benefits of giving shares as a gift is the educational opportunity it creates. In a world where financial literacy is increasingly important, this gesture can be a powerful tool. When someone is given a stake in a company, they are not only receiving a monetary asset but also a chance to understand the fundamental concepts of investing. They learn what it means to be a shareholder and how market dynamics affect the value of their investment. This early exposure can demystify the stock market and build confidence in handling finances.
For young investors, this type of gift might serve as the perfect introduction to the world of finance. They learn how the stock market operates, the importance of diversifying investments, and how to evaluate the performance of their portfolio. These lessons often extend well beyond the realm of investing, influencing their overall approach to managing money. By understanding that wealth creation is a gradual process requiring consistent effort, they can develop habits that pave the way for long-term financial success.
2. Building Wealth Over Time
Wealth accumulation is rarely an overnight process. It is a journey marked by continuous learning, steady investments, and time. Gifting shares or ETFs symbolizes this journey. With time and consistent growth, even a modest investment can blossom into a significant financial asset. This teaches an essential lesson: patience and persistence are key ingredients in the recipe for financial success.
Investments inherently come with risks, and learning to manage these risks is an important part of the educational process. When recipients see fluctuations in the value of their shares, they gain a realistic understanding of the market’s ups and downs. They learn to appreciate the value of staying invested for the long term, rather than reacting impulsively to short-term market volatility. This experience can help them build a resilient approach to personal finance, preparing them to handle larger and more complex investments in the future.
3. Empowering Ownership and Decision-Making
Owning shares is more than just holding an asset; it is an exercise in responsibility and decision-making. When you gift someone shares, you are entrusting them with the duty of managing an investment. This responsibility extends to decisions such as how to handle dividends, whether to reinvest them or use them for immediate needs. Over time, these decisions help shape the recipient’s understanding of financial management and risk assessment.
The experience of making investment decisions can have a profound impact on one’s life. It encourages a proactive approach to personal finance, where one learns to evaluate options carefully, consider potential outcomes, and make informed choices. This kind of decision-making process is valuable not only in financial matters but also in everyday life. It fosters a mindset of accountability and foresight, qualities that are indispensable in today’s dynamic economic environment.
4. Unlocking the Power of Compound Growth
One of the most compelling reasons to gift shares is the opportunity to harness the power of compound growth. Compound growth refers to the phenomenon where the returns earned on an investment are reinvested, leading to exponential increases in value over time. This process can dramatically enhance the growth of an investment, provided it is given sufficient time to work its magic.
For instance, a small investment made early in life can grow significantly over several decades due to compound interest. This principle is one of the cornerstones of successful investing and underscores the value of starting early. When shares or ETFs are gifted, the recipient gains a practical understanding of how small, regular investments can lead to substantial wealth in the long run. It’s a lesson in the power of patience and strategic planning, a lesson that can influence all areas of financial decision-making.
5. The Flexibility and Transferability of Investment Gifts
Another attractive feature of gifting shares or ETFs is their inherent flexibility. Unlike many physical gifts that may lose their appeal or become obsolete, investments are dynamic assets. They can be easily managed, transferred, or even sold as per the evolving needs and goals of the recipient. This flexibility ensures that the gift remains relevant throughout different stages of the recipient’s life.
For example, as financial goals change, whether it’s saving for higher education, buying a home, or planning for retirement, the investment can be adjusted or liquidated to meet those needs. Furthermore, shares and ETFs are not just short-term assets; they can be held for extended periods, allowing the recipient to benefit from long-term market trends. Their transferability also means that this gift can be passed down to future generations, creating a lasting legacy of financial prudence and planning.
6. Fostering Financial Responsibility and Long-Term Planning
Gifting shares or ETFs goes far beyond the simple act of giving; it promotes a culture of financial responsibility. When recipients inherit an investment, they are often motivated to learn about the nuances of managing money. This gift can inspire them to adopt a long-term view on their finances, emphasizing the importance of saving, investing wisely, and planning for the future. It is a tangible reminder that wealth is built over time through discipline and informed decision-making.
As the recipient becomes more familiar with the workings of the stock market and the value of compound growth, they are likely to adopt better financial habits. The experience teaches them that wealth is not merely the result of luck but the outcome of sustained effort and smart planning. Such insights can prove invaluable throughout life, influencing decisions related to careers, savings, and even retirement planning.
Having seen all the positives, the main question that comes to our mind is the tax treatment of these gifts.
Tax Implications of Gifting Shares and ETFs in India
While the benefits of gifting shares and ETFs are numerous, it is also important to understand the tax implications associated with these financial gifts, especially in India. The tax treatment for such gifts is primarily governed by the relationship between the donor and the recipient, as well as the subsequent handling of the gifted assets.
If shares or ETFs are gifted by a close family member, a parent, spouse, sibling, or child, they are generally not taxable when received. This is because the Income Tax Act in India exempts gifts from relatives from being taxed, regardless of the gift’s value. However, when the gift comes from a non-relative, the situation changes slightly.
In cases where the aggregate fair market value (FMV) of all gifts received from non-relatives during a financial year exceeds INR 50,000, the entire FMV of the gift is considered taxable income under the head “Income from Other Sources”. The valuation is typically based on the market value at the time the gift is received.
An additional aspect to consider is the tax treatment when the recipient decides to sell the gifted shares or ETFs. For the purpose of calculating capital gains, the “cost of acquisition” and the “holding period” are usually carried over from the donor. This means that if the donor purchased the shares at a lower price and held them for a long period, the capital gains when the recipient sells the shares will be computed based on the original purchase price and the donor’s holding period.
Depending on how long the shares have been held, taking into account both the donor’s and the recipient’s holding periods, the gains could be classified as either long-term or short-term.
In the case of long-term capital assets (typically when held for more than 12 months in the case of listed securities), the gains may be taxed at a favourable rate after considering applicable exemptions, such as the long-term capital gains (LTCG) exemption available for listed securities up to a specified limit. Conversely, if the holding period is shorter than 12 months, the gains are treated as short-term capital gains and are taxed according to the recipient’s income tax slab.
It is worth noting that India abolished the traditional “gift tax” regime in 1998. Nonetheless, the provisions under Section 56(2) of the Income Tax Act now govern the taxation of gifts received from non-relatives. Even if individual gifts fall below the INR 50,000 threshold, the total value of gifts received from non-relatives during the financial year must be taken into account.
Given that tax laws are subject to change and individual circumstances can vary, it is always a prudent decision to consult with a tax professional or financial advisor to ensure that you are fully compliant with current regulations and that you understand how these rules may impact your financial planning.
Conclusion
In conclusion, giving the gift of shares or ETFs is a powerful and innovative way to express your care and concern for your loved ones. Gifting shares or ETFs is not just an act of generosity; it is a forward-thinking investment in the recipient’s future. It opens the door to a lifetime of financial education, teaches the virtues of patience and long-term planning, and empowers individuals to take control of their financial destiny. This form of gifting is particularly meaningful in today’s world, where understanding financial markets is crucial for building and preserving wealth.
By choosing to gift an investment rather than a transient material object, you are setting a foundation for sustainable growth. It allows the recipient to experience firsthand how money can grow over time, and in doing so, encourages them to adopt prudent financial habits. Moreover, as they watch the investment mature and appreciate, they gain confidence and an intrinsic understanding of how disciplined financial decisions can lead to a more secure and prosperous future.
Furthermore, understanding the tax implications of such gifts in India ensures that both the giver and the receiver can navigate the financial landscape without unforeseen complications. By considering factors such as the relationship between the donor and the recipient, the method of valuation, and the nuances of capital gains tax, you can make informed decisions that maximize the benefits of this thoughtful gesture.
Check out my other blogpost on the top 6 Evergreen Personal Finance practises that you can follow to transform your financial future.
Do Follow me on Linkedin and Quora for more such insightful posts on investments, personal finance, insurance, money management, etc.
