When investing in the stock market, we often purchase shares ourselves; however, at times, we may also inherit shares from our family. Such shares often raise several questions for instance, how their value is determined, whether they are subject to tax upon sale, and how they can be transferred into one’s own Demat account. Understanding these aspects makes it easier to manage inherited stocks.
What Is Inherited Stock?
‘Inherited stock’ refers to shares that an individual receives as an inheritance. These shares may be acquired from a family member or another shareholder. Upon receiving them, the new owner must complete the process of transferring the shares into their own demat account.
Example: Suppose Rohit inherits 100 shares from his uncle. His uncle had purchased these shares at a price of ₹200 per share. Now, if the market price of these shares is ₹350 per share, their current value would be ₹35,000, whereas their total cost at the time of purchase was ₹20,000.
How Does Inherited Stock Work in India?
To understand the process of handling inherited stocks in India, follow these steps:
Step 1: Figuring out entitlement to the shares
Looking at a will, a nominee, or succession laws, we see who should receive the shares
Step 2: Identify the shareholdings
This involves determining which company’s shares the deceased investor held, the quantity of such shares, and where they were maintained.
Step 3: Transfer ownership
Once the prescribed procedure is completed and the claim is accepted, the shares are transferred to the eligible person’s Demat account.
Step 4: Exercise rights as the new owner
Following the transfer, the new owner becomes entitled to receive dividends and may benefit from or incur losses due to fluctuations in the share price.
Step 5: Decide whether to retain or sell the shares
The new owner may choose to hold or sell the shares, depending on the company’s performance and their own financial needs. If the shares are sold, capital gains tax is calculated in accordance with the applicable regulations.
How to Transfer Inherited Shares to a Demat Account
To transfer inherited shares into your Demat account, you must contact the broker or bank where the shares are currently held. You will then need to complete the following steps
Step 1: Contact the relevant broker
First, identify which broker or Depository Participant (DP) holds the shares and inquire about their specific share transfer process.
Step 2: Fill out the Transmission Form
Obtain a ‘Transmission Request Form’ from the broker and provide the details of the person who is to receive the shares.
Step 3: Submitting the required documents
You need to submit the death certificate, PAN card, and KYC details. If no nominee was named, you might also have to show a will or other legal paperwork.”
Step 4: Provide your Demat account details
Submit the details of the Demat account into which the shares are to be transferred, along with any necessary account-related documents.
Step 5: Document verification process
The broker goes through all your submitted paperwork. If they find any missing or incomplete information, they’ll get in touch so you can send over the required details.
Step 6: Checking the shares in your account
Once approved, the broker credits the shares directly to your Demat account. Simply log in to verify that the share count and account details line up correctly.
Read Also: Tax on Shares Received as Gifts: Rules for Investors
What Is the Cost Basis of Inherited Stock in India?
When you inherit shares, it is essential to determine the price at which the previous owner originally purchased them. This purchase cost is used to calculate the profit or loss realized when the shares are sold. This is known as the “cost basis” of inherited stock. In India, the original purchase cost incurred by the previous owner generally serves as the basis for inherited shares.
Example of the Cost Basis of Inherited Stock
Suppose you inherit 100 shares of a company. The previous owner had purchased them at a price of ₹200 per share. At the time you received the shares, the market price was ₹300.
| Description | Amount |
|---|---|
| Original purchase cost of shares | ₹20,000 |
| Market value at the time of inheritance | ₹30,000 |
| Amount on selling the shares later at ₹350 per share | ₹35,000 |
| Profit, before other adjustments | ₹15,000 |
Here, the profit has been calculated by subtracting ₹20,000 from ₹35,000, rather than by subtracting the ₹30,000 market value that existed at the time the inheritance was received.
In such a situation, refer to old broker statements, purchase contract notes, and demat records. If the shares are very old, or if there have been bonus issues or stock splits in the interim, additional information may be required to calculate the cost. Instead of estimating the cost, verify it based on available records.
How Are Inherited Stocks Taxed When Sold?
In India, receiving inherited shares generally does not attract capital gains tax. However, when you sell these shares, you may be liable to pay tax on the profit earned from the sale, in accordance with the applicable rules. When calculating the tax, factors such as the original owner’s acquisition cost and the total duration for which the shares were held are taken into account.
Short-Term and Long-Term Capital Gains Tax
If the inherited shares are equity shares listed on an Indian stock exchange and the relevant conditions regarding the Securities Transaction Tax (STT) are met, the applicable tax rates are as follows:
| Type of capital gain | Applicable tax rate |
|---|---|
| Short-Term Capital Gains (STCG) | 20% |
| Long-Term Capital Gains (LTCG) | 12.5% on eligible gains exceeding ₹1.25 lakh |
These rates apply to eligible share sale transactions that take place on or after July 23, 2024. The final tax amount may also include applicable surcharges and cesses. Different rules may apply to other types of shares.
Provide sales details in your tax return
After selling shares, keep the relevant contract notes, old purchase records, and capital gains calculations safe. You can use these records to provide accurate information when filing your tax return.
Can shares be sold immediately after being inherited?
Generally, shares can be sold once they have been transferred to your Demat account and are available for sale. However, before selling, check the records regarding their acquisition cost and the holding period of the previous owner, so that capital gains can be calculated accurately.
Should You Hold or Sell Inherited Stocks?
Deciding whether to hold or sell inherited shares depends on the company’s performance and your own need for funds. Do not hold onto shares simply because they were inherited from family.
When Should You Hold Inherited Stocks?
If the company’s earnings are sound, it is not burdened by excessive debt, and there is potential for future business growth, you might consider holding the shares. However, strong company performance does not guarantee an increase in the share price.
When Should You Sell Inherited Stocks?
If the company’s business is consistently weakening, its financial health is deteriorating, or you require funds for essential expenses, you might consider selling the shares. Before making a decision, be sure to review the company’s recent financial reports and the current share price.
What Should You Check Before Making a Decision?
Before deciding to hold or sell, examine the company’s earnings, debt levels, current valuation, and its weightage within your overall portfolio. For instance, if a large portion of your investments is already concentrated in a single company, holding additional shares of that same company could increase your risk.
Common Mistakes to Avoid With Inherited Stocks
In the case of inherited shares, minor oversights can lead to complications later on. Keep the following points in mind:
- Failure to locate records of original share purchases: Retain the original purchase records. Without these, determining the actual acquisition cost of the shares especially when calculating taxes can become difficult.
- Assuming the nominee is the ultimate owner: Just having a nominee listed on a Demat account doesn’t automatically settle every inheritance dispute. When there is a will involved or questions arise among legal heirs, you really need to check what the legal rules actually say.
- Overlooking bonus shares and stock splits: If the original owner received bonus shares or if the company underwent a stock split, the total number of shares and the cost per share will be affected. Therefore, review the company’s corporate action records.
- Applying the same tax rules to all shares: Tax rules aren’t the same for listed equity shares, unlisted shares, and other asset types. Before you sell anything, double-check which category your shares fall into and what specific tax rules apply to them.
- Not verifying records after the share transfer: When the transmission process finishes, check your Demat account to make sure the share count and company names are accurate. If you spot any mismatch, reach out to your broker or Depository Participant straight away.
- Filing tax returns without proper historical records: Once you sell your shares, hold onto the sale contract notes, proof of the original purchase cost, and your capital gains math. Don’t rely on guesses, always verify your numbers against proper records before filing.
Conclusion
If you have inherited stocks, do not be in a hurry to sell them. First, check how the company’s business is performing and ensure that you have the relevant historical documents for the shares. If you decide to sell the shares, be sure to calculate the tax implications so that you do not face any issues later.
Frequently Asked Questions (FAQs)
Can stocks be inherited in India?
Yes, stocks can be inherited, subject to applicable succession laws and the required procedures.
How do I transfer inherited stocks to my Demat Account?
To do this, you must submit a transmission application and the necessary documents to the relevant broker or Depository Participant (DP).
What is the cost basis of inherited stock?
Generally, the original owner’s purchase cost is considered the basis, subject to applicable tax regulations.
How are inherited stocks taxed when sold?
Capital gains arising from the sale of these stocks may be subject to tax in accordance with the applicable rules.
Can I sell inherited stocks immediately?
Generally, you can sell the stocks once they have been transferred to your Demat account and are available for sale.
