The capital gains on sale of shares are taxed according to their age of holdings which determine Long Term or Short Term. Any gains made out of listed (in India) shares within 12 months of holdings is Short Term Capital Gains to be taxed at 15% whereas gains incurred after 12 months are exempted from tax. But this simple calculation become complex when one has to calculate the taxation for the Bonus Issues, Right Issues & Split of the Shares. Let us understand how to differentiate these & calculate the tax liabilities.
Taxation for Bonus Issue of Share & Capital Gains on Sale
Bonus share is a form of stock dividend to investors by the company apart from cash dividend. In both the cases, dividend (includes bonus issues) are tax free in the hand of investor. But is to be noted, cash dividend receipt of over Rs. 10 lacs per annum to be taxed at 10% which is over and above dividend distribution tax. However, the tax implication of bonus share is not a simple math for many investors. Well! Let’s understand it;
Assume you had bought 500 share of a company on Jan 10, 2015 at Rs. 150 per share. On May 1, 2017 the company announces bonus share in the ratio of 1:1, thus you got additional 500 shares. With this, you have now 1,000 share of the company. If you sell all these 1,000 stocks on May 08, 2017 at Rs. 350 per share then the capital gains would be calculated separately for bonus shares & original shares.
With the above scenario, tax is levied depending on the nature of the capital gains. If the capital gains are long term in nature, such gains would be exempted from capital gains tax under section 10(38) and in case such gains are short term in nature, gains would be taxable @ 15% under section 111A.
Bonus issues are referred to as a dilution in equity. With this, the earnings of the company will have to be divided by new total shares i.e. Earnings Per Share = Net Profit/ Number of Shares. Since the profits remain the same, but the number of shares has increased, the EPS will decline. This represents, the stock price also decreases proportionately.
Taxation for Right Issue of Shares & Capital Gains on Sale
It is in the form of additional shares buying options given to existing shareholders of the company at a price lower than the current prevailing market price. Refer above example, if additional 500 shares are bought by way of right issue on May 1, 2017 at a price of Rs. 250 per share (assume market price is Rs. 280 per share) then the capital gains on sale of these shares would be in the same manner as capital gains on the sale of bonus shares except for the fact that in case of bonus shares, the cost of acquisition for acquiring the bonus shares is Zero, whereas in case of right shares the cost of acquisition for acquiring the Right Shares would be the price paid for acquiring the right shares.
When the entire 1,000 shares are sold, due to long term capital gains in nature, the sale of first set of original 500 shares would be exempted from tax, but short term capital gain tax will be applicable for sale of 500 right shares as mentioned below;
Taxation for Split of Shares & Capital Gains on Sale
Most of the time bonus issue of share or stock split are understood same, but actually not. A bonus issue is different from a stock split, in which case the face value of shares fall by whatever ratio the company decides to split. In case of bonus issue, the face value does not change. In case of sale of stock split, the date of acquisition of the split shares would be the same as the date of acquisition of the original shares. In this case, the cost of acquisition will also be reduced in the same proportion to the original and the split shares.
For example, assume you had bought 500 share of a company on Jan 10, 2015 at Rs. 150 per share. If the company splits the shares on May 01, 2017 in the ratio of 1:1, the investor will have total 1,000 shares after the split. Here purchase price will be reduced by 50% making it at Rs. 75 per share which keeps the entire cost of purchase for 1,000 share remain same i.e. 500 shares (before split) × Rs. 150 = 1,000 shares (after split) × Rs. 75. If you sell all these 1,000 stocks on May 08, 2017 at Rs. 100 then the capital gains would be calculated as below;
Hope this article helps you to know the types of issue of shares, split of share & their taxation on sale. Do share you view or ask queries in the comment section.