Taxation of Bonus, splitting and Right issue of Shares

There are capital gains on sale of shares and in this article, we will study about the capital gains tax when you sell bonus shares or the shares acquired through splitting or right issue of shares.

If the capital gains on sale of equity shares is long term, tax on such gains would be levied @ 10% from Financial Year 2018-19 onwards on the gains above Rs. 1,00,000/- and in case such gains are short term in nature, gains would be taxable at 15% under section 111A of the IT Act’1961.

Capital gains on sale of Bonus shares

Now let us see how the gains will be taxable in case of Bonus shares and how will the capital gains be calculated.

Bonus shares are shares which are allotted to the shareholders as a bonus i.e for free which means that there is no cost of acquisition of such bonus shares.

Most of the times the company issues bonus shares as a proportion of existing shares for example 1:1 bonus or 2:1 bonus or 1.5:1 bonus etc.

Let us study this with the help of an example:

Example: Suppose X purchased 5000 shares of PQR Ltd. for Rs. 50,000/- at Rs. 10/- per share on 01.04.2022 and the company issued a bonus of 2:1 on 01.10.2022. It means 10,000 bonus shares were issued by the company in lieu of 5000 original shares. Now let us say on 03.03.2023, X sold all the shares of PQR Ltd. including bonus shares i.e 15,000 shares were sold for Rs. 3,00,000/- i.e Rs. 20 per share. What will be the capital gains on such transfer of shares?

Ans: In this case, the cost of acquisition of the original and the bonus shares would be different and consequently the capital gains will also be different. The capital gains will be calculated differently as below:

For the original 5000 shares

For the Bonus 10,000 shares

Here the Cost of acquisition of Bonus shares will be NIL as these were bonus shares allotted for free to the shareholder ‘X’.

There is no capital gains on allotment of Bonus shares and the capital gains will be levied at the time of sale of these bonus shares.

Period of Holding

The period of holding would be calculated separately for original shares and bonus shares. The date of allotment of bonus shares would be considered as the date of acquisition of such shares for the purpose of capital gains.

Suppose in the above example, only 6500 shares were sold out of the 15,000 shares for a consideration of Rs. 1,30,000 i.e Rs. 20/- per share then the capital gain will be calculated on FIFO Basis. The first 5000 shares will be considered at the ones purchased by the shareholder and the next 1500 will be out of the bonus shares whose cost would be NIL.

For the first 5000 shares 

For the next 1500 shares

Capital gains on Splitting of shares

Now we will see the taxation in case of splitting of shares. There are few differences when it comes to Cost of acquisition and period of holding in case of splitting of shares.

When the shares of the company are split, the existing shares of the company are split into number of shares as approved by the company. For example, If ‘X’ has 5000 shares and the company announces a stock split of 1:1, it means the shareholder gets 1 share for every share the shareholder holds and will get 5000 additional shares for the original shares and the shareholder now has 10,000 shares.

The main difference between Bonus shares and splitting of shares is that the cost of the shares will be split between the original shares and the split shares. Therefore, if in the above example ‘X’ has 5000 shares and the company announces a stock split of 1:1, it means the shareholder gets 1 new share for every share the shareholder holds and will get 5000 additional shares for the original shares. Suppose the cost of the original shares was Rs. 5,00,000/- i.e Rs. 100/- per share. Now after splitting and allotment of new shares the cost of the combined shares will be Rs. 5,00,000/- also and the cost will be divided into 10,000 shares i.e cost of each share will be 5,00,000/10,000 = Rs. 50 per share.

Now suppose these shares are sold, the capital gains will be calculated as follows:

Eg: If ‘X’ purchased 5000 shares at Rs. 10/- each on 01.04.2021 and the company announces a stock split of 1:1 on 31.10.2021, it means the shareholder gets 1 share for every share the shareholder holds and the shareholder now has 10,000 shares. Now, the shareholder sells these 10,000 shares 31.03.2023 for Rs. 20 per share. What will be the capital gains on this sale of shares?

Ans: Capital gains on the sale of these shares will be as follows:

For the sale of original 5000 shares

Now after the splitting of shares the cost of the shares will be split into original as well as split shares:

The total Cost of shares will be Rs. 5000*10 = Rs. 50,000/-. Now the cost of acquisition will be split into original and split shares as Rs. 50,000/10,000= Rs. 5 per share.

For the sale of new split 5000 shares

The period of holding of the split shares would be considered as the same as the period of holding of the original shares and therefore the gains will be LTCG as the period of holding is more than 1 year and the cost of acquisition would be apportioned proportionately i.e (Rs. 5000*5).

Ques: What happens if both bonus shares and split shares are allotted to a person. How will the taxation on sale of shares be calculated?

Ans: Now let us see the taxation in case both Bonus shares and share splitting applies to a person.

Ex: Suppose a person ‘Y’ purchased 5000 Equity shares for Rs. 5,00,000/- at Rs. 100 per share on 01.11.2021 of ABC Ltd. Now the company announced a split of 10 shares for each share. Therefore, 5000 shares increased 50,000 shares and the face value decreased to Rs. 10/- each on 01.02.2022. Therefore ‘Y’ has 50,000 shares of Rs. 10/- each. Now the company allots bonus shares in the ratio 1:2 on 01.04.2022 i.e it allots 25,000 shares bonus shares in lieu of 50,000 shares the shareholder was holding. Therefore, the shareholder now holds 75,000 shares of Rs. 10 each. Now on 01.01.2023, the shareholder sells all the 75,000 shares for Rs. 200 each i.e for a consideration of Rs. 1,50,00,000/-.

How will the capital gains be calculated in this case?

Solution:

Since the original 5000 shares were split into 50,000 shares, therefore the cost of the shares including the split shares will be also split in 1:10 as follows:

Cost of 50,000 shares will be Rs. 5000/50,000*100 = Rs. 10 per share or simply 5,00,000/50,000= Rs. 10 per share.

Now the original cost of 50,000 shares will Rs. 50,000*10= Rs, 5,00,000/- i.e the cost of shares remains same as the amount originally paid but it is now the cost of 50,000 shares instead of 5,000 shares and the cost per share becomes Rs. 10/- each. The date of acquisition of shares remains the same as original shares i.e 01.11.2021.

therefore, the Capitals will be calculated as follows:

For the sale of the first 50,000 shares

Here the capital gains on first 50,000/- shares will be LTCG as the original shares were purchased on 01.11.2021 and sold on 01.01.2023 therefore after more than 1 year and hence long-term capital gains.

For the sale of the first 25,000 shares

Since, these 25,000 shares were bonus shares therefore, the cost of these shares will be zero.

Here the period of holding of these Bonus shares will be from the allotment of shares i.e 01.04.2022 and sold on 01.01.2023, therefore short-term capital gains.

Situation 2:

Suppose in the above example say only 10,220 shares were sold at Rs. 200/- per share then how would the calculation of capital gains be?

Ans: Since in the above case only 10,220 shares have been sold, we will apportion the cost of acquisition (COA) on FIFO Basis i.e. the shares which were purchased first would be assumed to be sold first and cost of acquisition of such shares would be taken for the purpose of computation of capital gains.  Since the company had 5000 shares and then split into 50,000 shares therefore the sale of 10,220 shares will be from the first 50,000 split shares and therefore to determine the cost, we will split the cost of acquisition of the above shares proportionately as follows:

COA = 5,00,000/50000*10220 = Rs. 1,02,220/-

Therefore, the capital gains will be as follows:

Capital gains on the sale of the 10,220 shares

Capital Gains Tax on Sale of Right Shares

Right shares are shares in which the existing shareholders are given the option to acquire more shares in the company in a particular proportion or ratio to the existing shares at a price lower than the current prevailing market price.

The Capital Gains on the sale of Right Shares would be computed 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 Nil, whereas in the case of Right Shares the cost of acquisition for acquiring the Right shares would be the price paid for the purchase of those right shares.

Let’s take an example of the above:

Mr. X purchases 200 shares at Rs. 50 on 1-4-2019. On 1-7-2020, the company gives the existing shareholders an option to purchase more shares of the company at Rs. 45 and Mr X purchases 100 shares at Rs. 45. On 1-10-2020, Mr. X sells all 300 shares for Rs. 65 per share.

Capital Gains on sale of original 200 Shares purchased on 1-4-2019 & sold on 1-10-2020

Capital Gains on sale of 100 Right Shares purchased on 1-7-2020 & sold on 1-10-2020

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(The author is a Chartered Accountant and can be contacted at [email protected] or [email protected] or Mobile: +91-9953199493)