Table of Contents
- Additional shares issued by a company to existing shareholders based on already owned shares.
- No additional cost is required.
- Issued to provide an incentive and increase the equity base of the company.
- Dependent on whether shares are held as stock-in-trade or as a capital asset.
- If held as a capital asset, any profit or gain arising from transfer is taxable as capital gains.
- If held as stock-in-trade, gain or loss arising is taxable under the head profits and gains from business and profession.
Taxation Under the Head Capital Gains:
- Gains calculated only at the time of transfer of shares.
- If bonus shares held as a capital asset, profit from transfer is taxable under the head capital gains.
- Period of holding determines classification as long-term or short-term capital asset.
- Cost of acquisition is nil if bonus shares are allotted without payment based on original shares.
- Sale consideration is the amount received or receivable from transfer.
- Short-term capital gains taxed at 15% if STT is paid, otherwise added to taxable income.
- Long-term capital gains taxed at 10% if STT is paid, otherwise 10% or 20% under section 112.
Taxable Under the Head Profits and Gains from Business or Profession (PGBP):
- Bonus shares held as stock in trade are taxable under PGBP.
- Shares recorded in books at cost of acquisition.
- Gains or losses calculated based on sale consideration, cost of acquisition, and expenditure relating to the sale.
- Assessable under head ‘Profits and gains from business or profession’ at applicable tax rates.
Taxation on Share Split or Consolidation of Shares
|Taxation on Share Split or Consolidation of Shares||– Stock split: dividing outstanding shares into smaller shares.
– Consolidation of shares: merging shares to decrease the number of shares and increase market value per share.
– No tax on splitting or consolidation, but tax on sale of converted shares.
|Cost of acquisition of shares after consolidation||Total amount paid for original shares apportioned between consolidated shares.|
|Example of cost of acquisition after consolidation||Mr A had 2,000 shares of XYZ Ltd. at Rs. 100 each. The company consolidated 2 shares into 1 share of Rs. 200 each. After consolidation, Mr A had 1,000 shares of Rs. 200 each. Cost of acquisition of consolidated shares = Rs. 200 per share.|
|Cost of acquisition of shares after split||Amount paid for original shares divided proportionately to split shares.|
|Example of cost of acquisition after split||Mr A purchased 1,000 shares of XYZ Ltd. at Rs. 150 each with face value of Rs. 100. The company split one share into two shares of Rs. 50 each. After split, Mr A had 2,000 shares of Rs. 50 each. Cost of acquisition of split shares = Rs. 75 per share.|
|Period of holding||Calculated from acquisition of original shares.|
|Taxation under the head PGBP||Gains calculated only at sale/transfer of split up or consolidated shares held as stock in trade.
– ICDS-VIII (Securities) records such shares at cost of acquisition.
|Example of business income calculation||Mr Rishabh bought 10,000 shares of a company at Rs. 400 each, held as stock in trade. The company split shares into two of Rs. 50 each. He sold 20,000 shares at Rs. 207 each.
Business income = Rs. 140,000 [(20,000 shares * (Rs. 207 – Rs. 200)].
Taxation of Buyback of Shares-
|Topic||Taxation of Buyback of Shares|
|Meaning of buy-back||Purchase of a company’s own shares in accordance with the law|
|Domestic company liability||Liable to pay tax on distributed income under section 115QA|
|Shareholder exemption||Consideration received by shareholders is exempt under section 10(34A)|
|Capital gains tax||Shareholders of foreign companies pay capital gains tax under Section 46A|
|Changes in provisions||Finance (No. 2) Act, 2019 extended provisions to listed and unlisted shares|
|Distribution tax rate||Domestic company tax rate is 20% + 12% surcharge + 4% cess|
|Payment of tax||Tax must be paid within 14 days through challan No. ITNS 280|
|Consequences of default||Interest at 1% per month for late payment, deemed assessee-in-default|
Example: Mr. X subscribed to 10,000 shares of ABC Ltd at Rs. 100 per share, and the company announced a buyback at Rs. 125 per share. The liability in the hands of the company and Mr. X are:
- Mr. X: No income is assessable as the income arising due to buyback of shares is exempt under section 10(34A).
- ABC Ltd: Liable to pay tax on distributed income under section 115QA at a rate of 20% + 12% surcharge + 4% cess. The tax must be paid within 14 days through challan No. ITNS 280. Failure to pay within the specified time will result in interest at 1% per month and being deemed as an assessee-in-default.
Taxation of Companies in Liquidation-
|Taxation of Companies in Liquidation||Liquidation or winding up refers to the process of ending the business of a company, which involves selling the assets of the company. The taxation of companies in liquidation can be understood by considering the tax liabilities in the hands of the company and the shareholders, the computation of capital gains, and an example illustrating the taxability in the hands of the company and the shareholder.|
|Meaning of Liquidation||Liquidation or winding up refers to the process of ending the business of a company, which involves selling the assets of the company. The term dissolution means official extinction of the corporate person.|
|Tax Liability in the hands of the Company||If the liquidator sells the assets and distributes the cash so realized to the shareholders, the company shall be liable to tax on the capital gains arising from the sale of the assets. However, if the assets are distributed to the shareholders on liquidation, no capital gains arise in the hands of the company.|
|Tax Liability in the hands of the Shareholders||Any distribution made to the shareholders on liquidation, to the extent it is attributable to the accumulated profits of the company, is treated as deemed dividend taxable under the head income from other sources. Any amount distributed over and above the amount treated as dividend is taxable as capital gains in the hands of shareholder. The capital gains shall be liable to tax in the year which assets are distributed to the shareholders.|
|Computation of Capital Gains||The capital gains accruing to a shareholder from the distribution of assets by a company in liquidation are determined by deducting the amount treated as deemed dividend, cost of acquisition/indexed cost of acquisition of shares, and expenditure in connection with transfer from the sales consideration (market value of asset on the date of distribution).|
Taxation of Right Issues-
|Meaning of Right Issue||A way of raising additional capital by giving existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings at a price lower than the market price.|
|Taxability at the time of renunciation of right||Capital gains will arise in the hands of the shareholder who renounces his right in favour of any other person. Any right available to a shareholder to subscribe to shares is treated as ‘capital asset’ under Income-tax Act.|
|Cost of acquisition||The cost of acquisition of the rights so renounced shall be nil.|
|Period of holding||The period of holding of such capital asset shall be reckoned from the date of offer made by the company to the date of renouncement. Such right is deemed as ‘short-term’ if it is held for not more than 36 months preceding the date of its transfer.|
|Sale consideration||The sale consideration shall be the amount received or receivable by the person renouncing the right.|
|Computation of capital gains||Sale consideration minus cost of acquisition and expenditure in connection with transfer will give you the short-term capital gains.|
|Applicable tax rates||Short term capital gains are chargeable to tax as per the tax rate applicable according to the status of the assessee.|
Taxation in case of Mergers & Acquisitions
|Aspects of Taxation||Explanation|
|Meaning of Merger||– Merger is the voluntary fusion of two companies either by closing the existing companies and making a new one or by one company absorbing the other company.
– Amalgamation is defined as the merger of one or more companies with another company or the merger of two or more companies to form one company.
|Taxability at the time of allocation of shares||– No tax implication in the hands of the shareholder at the time of allotment of shares of the amalgamated company in lieu of shares held as capital asset in the amalgamating company.
– Transfer is not regarded as transfer as per Sec 47(vii) provided the amalgamated company is an Indian company.
|Taxability at the time of transfer of shares||– If the shares acquired in the amalgamated co. are held as capital asset, the profits from its transfer shall be taxable under the head capital gains.
– If such shares are held as stock-in-trade, the profit or losses arising from the transfer shall be taxable under the head profits and gains from business or profession.
|Shares held as capital assets||– The capital gains from transfer of shares acquired in the amalgamated company shall be computed as per general provisions.
– The cost of acquisition of the shares acquired in the amalgamated company shall be the amount paid by the shareholder at the time of acquisition of original shares of the amalgamating company.
– The period of holding is reckoned from the date of acquisition of original shares in the amalgamating company.
|Shares held as stock-in-trade||– The gains or loss from transfer of shares acquired in the amalgamated company shall be computed as per general provisions.|
Taxation in case of Stock Lending and Borrowing
|Meaning of Stock Lending||SLB is a system wherein a person can lend his securities to a borrower through approved intermediary for a specified period. It is a temporary lending of securities executed by a lender to a borrower, for a stipulated duration, for a certain fee.|
|Regulatory framework||SEBI regulates the lending and borrowing of securities through Securities Lending Scheme, 1997. All market participants in the Indian securities market are permitted to lend and borrow securities through an Authorized Intermediary (AI).|
|Process of lending and borrowing||Lender and borrowers place an order with intermediary mentioning the stock, quantity to lend or borrow, time period, and lending fees. The borrower is required to deposit 100% of the lending price and lending fees on an upfront basis.|
|Benefits of SLB||Lender can earn incremental return on an idle portfolio. Borrower can borrow securities to cover short-positions, avoid settlement failure or for arbitrage or hedging strategies.|
|Taxability in hands of lenders||The fee earned from lending business shall be taxable under the head ‘profits and gains from business or profession’ or ‘Income from other sources’.|
|Taxability in hands of borrowers||Any gains or losses arising to the borrower from the sale of such shares shall be taxable under the head capital gains or PGBP, as the case may be. The fee paid by the borrowers may be claimed as deduction while computing the income under capital gains or PGBP.|
Taxation in case of conversion of Preference Shares into Equity Shares
|Definition of ‘Transfer’||Section 2(47) of the Income-tax Act includes exchange of assets within the definition of ‘transfer’. Any conversion of an asset into other asset is also an ‘exchange’ and is treated as transfer, thereby attracting capital gains tax.|
|Exclusion from the scope of ‘Transfer’||Section 47 of the Act specifically excludes certain types of transfer from the scope and meaning of the word ‘transfer’ in relation to a capital asset. The transaction of conversion of preference shares into equity shares has been excluded from the scope of transfer.|
|Tax Implications of Conversion||As per Section 47(xb) of the Income-tax Act, conversion of preference shares of a company into equity shares of that company is not treated as transfer. Thus, no capital gain shall arise on conversion of preference shares into equity shares.|
|Cost of Acquisition and Holding Period||When a person subsequently sells equity shares, the cost of acquisition thereof shall be the same as that of the preference share. Further, the period of holding of equity shares shall be reckoned from the date of acquisition of the preference shares.|
|Calculation of Capital Gain on Transfer||The capital gain arising on transfer of equity shares shall be computed in the financial year in which the transfer takes place. For example, in the given case, the capital gain shall be computed in the financial year 2020-21. Long-term capital gain tax in excess of Rs. 100,000 shall be charged at the rate of 10% under Section 112A of the Income-tax Act.|
Taxation in case of Conversion of Stock into Capital Asset
|Taxation in case of Conversion of Stock into Capital Asset||Inventory of a business converted into or treated as a capital asset, FMV of inventory on date of conversion shall be taxable under ‘profit and gains from business or profession’|
|Valuation of FMV of stock on date of conversion||If shares/securities held as stock-in-trade are converted into capital asset, FMV is determined as per Rule 11UAB of Income Tax Rules, 1962|
|Determination of cost of acquisition of converted asset||FMV of stock on date of conversion taken into consideration for determining business income is considered as cost of acquisition of converted capital asset|
|Period of holding of converted asset||Period of holding of converted capital asset is reckoned from the date of conversion or treatment as capital asset|
Taxation in case of Segregated Portfolios of Mutual Funds
Creation of Segregated Portfolio Allowed by SEBI for debt and money market instruments Allotment of Units All existing unit holders in the affected scheme as on the day of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio.
Taxability of Income Similar to normal mutual funds
Period of Holding Inclusion of the period for which the original units were held in the main portfolio in the period of holding of the units acquired in the segregated portfolio Cost of Acquisition Computed by reducing the cost of acquisition of units held in the main portfolio from the cost of acquisition of units in segregated portfolio.
Taxation in case of Consolidation of Mutual Fund schemes or plans
|Topic||Taxation in case of Consolidation of Mutual Fund schemes or plans|
|Transfer of Units||Any transfer of units held by a unit-holder in the consolidating scheme of a mutual fund in consideration of allotment of units in the consolidated scheme of the mutual fund shall not be treated as transfer|
|Exemption||The exemption is available provided the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund|
|Period of Holding||Where units of a mutual fund become the property of the assessee in the consolidation scheme of a mutual fund, the period for which the units were held under consolidating scheme is also included in the period of holding of units acquired.|
|Where units of consolidated plan become the property of the assessee in consolidation of the plans within the scheme of a mutual fund, the period for which the unit or units were held under consolidating plan within the scheme is also included in the period of holding of units acquired.|
|Cost of Acquisition||Where units in a consolidated scheme of mutual fund became the property of the assessee in consideration of any transfer of units, held by him in the consolidating scheme of a mutual fund, the cost of acquisition of such units is deemed to be the cost of acquisition of the units held by him in consolidating scheme of the mutual fund.|
|Where units in a consolidated plan of mutual fund became the property of the assessee in consideration of any transfer of units, held by him in the consolidating plan of the same a mutual fund, the cost of acquisition of such units is deemed to be the cost of acquisition of the units held by him in consolidating plan of the mutual fund.|
Taxation in case of winding up of Mutual Funds-
Here are the notes on taxation in case of winding up of mutual funds:
|Types of schemes that can be wound up||Close-ended schemes are wound up on the expiry of the scheme duration. Other schemes can be wound up on the happening of an event requiring the scheme to be wound up, or with the approval of 75% of unit holders, or as directed by the Board in the interest of unit holders.|
|Notice for winding up||Trustees must give notice of the circumstances leading to the winding up of the scheme to SEBI and in two daily newspapers with circulation in India and a vernacular newspaper at the place where the mutual fund is formed.|
|Procedure and manner of winding up||Trustees call a meeting of unit holders to approve the winding up of the scheme. The trustee or authorized person disposes of the scheme’s assets and uses the proceeds to pay liabilities and expenses before distributing the balance to unit holders in proportion to their respective interest in the scheme’s assets as on the winding up decision date.|
|Report on winding up||The trustee forwards a report on the winding up to SEBI and the unitholders.|
|Delisting of units||Units of a mutual fund scheme are delisted from a recognized stock exchange as per SEBI guidelines.|
|Taxation||The amount received on winding up of mutual funds is treated like normal redemption amount for tax purposes.|