Capital Gains Tax on sale of Bonus Shares & Right Shares

Share This Article

At the time of sale of shares, Capital Gains 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, such gains would be taxable @ 15% under section 111A

Recommended Read:-

Capital Gains Tax on Sale of Bonus Shares

Bonus Shares are shares which are allotted for free to the shareholders and the shareholders don’t have to pay anything for purchasing these shares.

Bonus Shares are usually issued in proportions. This can be explained with the help of the following example.

For eg: Mr X acquires 200 shares of a company on 1-7-2005 at Rs. 50 each. On 9-11-2012, the company allotted bonus shares in the ratio 1:1. This basically means that for every 1 share held, the company would be allotting 1 bonus share. Therefore in the above example as Mr X holds 200 shares, he would be allotted 200 shares as bonus. So, the total shares held by Mr. X on 9-11-2012 are 400.

Now on 3-07-2013, Mr X sells all his 400 shares at a price of Rs. 250. In such a case, the Capital Gains would be computed separately for the original shares and bonus shares as explained below:-

Capital Gains on sale of original 200 shares purchased @ 50 each

Selling Price 200*250 50000
Cost of Acquisition 200*50 10000
Expenses on Transfer (assumed to be Nil for the purpose of simplicity) Nil
Capital Gains on sale of Original Shares 40000

Capital Gains on sale of 200 Bonus Shares

Selling Price 200*250 50000
Cost of Acquisition 200*0 0
Expenses on Transfer (assumed to be Nil for the purpose of simplicity) Nil
Capital Gains on Sale of Bonus Shares 50000

Period of Holding

The period of holding would be calculated separately for original shares and bonus shares.

In case of the 200 original shares which were purchased on 1-7-2005, the period of holding is more than 1 year and therefore these would be classified as Long Term Capital Gains. Under Section 10(38), long term capital gains are exempted from the levy of capital gains tax and therefore No tax would be levied on the capital gains on Rs. 40000 earned from the sale of the original shares. Although no tax is levied on long term capital gains from sale of shares, such gains would be required to be disclosed at the time of filing of income tax return

In case of the 200 bonus shares which were allotted on 9-11-2012, the period of holding is less than 1 year and therefore these would be classified as short term capital gains and therefore tax on these gains would be levied @ 15% under Section 111A.

tax bonus shares Capital Gains Tax on sale of Bonus Shares & Right Shares

Capital Gains Tax on Sale of Right Shares

Right Share is a share in which the existing shareholders are given the option to acquire more shares in the company at a price lower than the current prevailing market price.

The Capital Gains Tax 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 case of Right Shares the cost of acquisition for acquiring the Right Shares would be the price paid for acquiring the right shares.

In case of both Bonus Shares and Right Shares, the period of holding would be calculated separately for the Original Shares and the Bonus Share/Right Share.

Points to be noted:-

  1. Period of Holding is the period from the date of purchase to the date to sale
  2. In case of Stock splits, the date of acquisition of the divided shares is considered as the same as the date of acquisition of the original shares.
  3. In case the shares were purchased on different dates and only a proportion of the shares have been sold, the shares would be assumed to be sold 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.

Subscribe for Free Updates