Capital Gains Tax on sale of Bonus, Right & Split Shares (with examples)

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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, tax on such gains would be levied @ 10% from Financial Year 2018-19 onwards 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 1-5-2014 at Rs. 50 each. On 9-11-2016, 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 revised no. of shares held by Mr. X on 9-11-2016 are 400.

The fair market value of the share as on 31/01/2018 was Rs. 220.

Now on 3-07-2018, 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. 

For the computation of capital gains on both, the 1st thing to be determined is the Cost of Acquisition. And for the purpose of determination of the cost of acquisition, we’ll have to rely on Sec 55(2)(ac) which has been inserted by Finance Act 2018.

Cost of Acquisition of Original & Bonus Shares

As per Section 55(2)(ac), the cost of acquisition would be higher of:-

  1. The Cost of Acquisition of such asset; and
  2. The lower of:-
    1. The fair market value of such asset as on 31/01/2018; and
    2. The full value of consideration received or accruing as a result of the transfer of the capital asset.

In simple words, the higher of the cost of acquisition or the fair market value as on 31/01/2018 would be considered.

(However, in case the fair market value as on 31/01/2018 is higher than the Sale Price, the Sale Price would be considered instead of the Fair Market Value and then compared with the actual cost of acquisition.)

Determination of Cost of Acquisition of Original Shares

Particulars   Lower   Higher
Cost of Acquisition     50 220
Fair Market Value as on 31/01/2018 220 220 220
Full Value of Consideration (Sale Price) 250

 

Capital Gains on sale of original 200 shares purchased

Particulars Amount
Selling Price (200*250) 50000
Cost of Acquisition (200*220) 44000
Expenses on Transfer (assumed Nil) Nil
Capital Gains on sale of Original Shares 6000

 

Capital Gains on sale of 200 Bonus Shares

No Tax would be levied at the time of allotment of such bonus shares. Tax would only be levied at the time of sale of such bonus shares.

For the purpose of computing of capital gains, the 1st thing which would be required is the cost of acquisition using the same method as explained above.

Using the above mentioned method, the cost of acquisition of bonus shares is arrived at as below:-

Determination of Cost of Acquisition of Original Shares

Particulars   Lower   Higher
Cost of Acquisition      0 220
Fair Market Value as on 31/01/2018 220 220 220
Full Value of Consideration (Sale Price) 250

 

Therefore the capital gains would be as follows:-

Particulars Amount
Selling Price (200*250) 50000
Cost of Acquisition (200*220) 44000
Expenses on Transfer (assumed Nil) Nil
Capital Gains on Sale of Bonus Shares 6000

 

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 1-5-2014, the period of holding is more than 1 year and therefore these would be classified as Long Term Capital Gains. Tax on such Long Term Capital Gains arising from the sale of shares would be levied @ 10% from Financial Year 2018-19 onwards.

In case of the 200 bonus shares which were allotted on 9-11-2016, the date of allotment of such shares would be considered as the date of acquisition. Therefore the period of holding in the above mentioned case for bonus shares would also be long term and therefore tax on these gains of Rs. 6,000 tax would be levied @ 10%.

tax-bonus-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.

This can be explained with the help of an example. For example: Mr X purchases 200 shares @ Rs. 50 on 1-1-2016. On 1-5-2017, the company gives the existing shareholders an option to purchase more shares of the company @ Rs. 45 and Mr X purchases 100 shares @ Rs. 45. On 1-10-2018, Mr. X sells all his shares i.e. 300 shares for Rs. 65.

The fair market value of shares as on 31/01/2018 was Rs. 55

Capital Gains on Sale of Original Shares

Determination of Cost of Acquisition of Original Shares

Particulars   Lower   Higher
Cost of Acquisition     50 55
Fair Market Value as on 31/01/2018 55 55 55
Full Value of Consideration (Sale Price) 65

 

Capital Gains on sale of 200 Shares purchased on 1-1-2016 & sold on 1-10-2018

Selling Price (200*65) 13,000
Cost of Acquisition (200*55) 11,000
Expenses on Transfer (assumed Nil) Nil
Period of Holding (Purchased on 1-1-2019 and hold for more than 1 year) Long Term
Capital Gains on sale of original 200 shares Rs. 2,000
Tax to be paid @ 10% Rs. 200

 

Capital Gains on sale of 100 Right Shares purchased on 1-5-2017 & sold on 1-10-2018

In case of right shares, the date of acquisition of the divided shares is considered as the same as the date of acquisition of the original shares.

Determination of Cost of Acquisition of Original Shares

Particulars   Lower   Higher
Cost of Acquisition     45 55
Fair Market Value as on 31/01/2018 55 55 55
Full Value of Consideration (Sale Price) 65

 

Therefore the capital gains would be computed in the following manner:-

Selling Price (100*65) 6,500
Cost of Acquisition (100*55) 5,500
Expenses on Transfer (assumed Nil) Nil
Period of Holding (Purchased on 1-5-2020 and hold for less than 1 year) Short Term
Capital Gains on sale of original 100 shares Rs. 1000
Tax Rate  10%

 

Capital Gains Tax on sale of Split Shares

Although to a layman, it may seem that the meaning of bonus shares and split shares is the same but technically speaking – both of these are 2 different things. Although their impact on the market price may be the same but stock split is different from bonus shares and therefore they are taxed differently.

The manner of computation of capital gains tax on sale of bonus shares has already been explained above and now we would be discussing about the capital gains tax on the sale of stock splits.

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. The cost of acquisition in the case of a stock split would be divided proportionately to the original and the split shares. The same has been explained below with the help of an example.

For ex: Mr. X purchases 500 shares of a company on 1-4-2020 for Rs. 50 each. On 1-8-2020 – the company announces that they have split their shares in the ratio of 1:1 i.e. for every 1 share you’ll get an 1 extra split share. Therefore, Mr. X now has a total of 1000 shares i.e. 500 original shares + 500 bonus shares.

On 1-7-2021, Mr. X sells all the 1000 shares @ Rs. 60 each. The Capital Gains Tax in such a case would be computed in the manner specified below.

Cost of Acquisition in such a case would be computed proportionately in the manner specified below.

Total Cost of acquisition = 500*50 = 25000

Total Shares owned after issue of split shares = 500 + 500 = 1000 shares

Cost of acquisition of original and split shares to be apportioned = 25000/1000 = Rs 25 per share

Tax on sale of original 500 shares

Selling Price (500*60) 30,000
Cost of Acquisition (50*25) 12,500
Expenses on Transfer (assumed Nil) Nil
Period of Holding (Purchased on 1-4-2020 and hold for more than 1 year) Long Term
Capital Gains on sale of original 500 shares Rs. 17500
Tax @ 10% Rs. 1,750

 

Capital Gains on sale of 500 Split Shares issued on 1-8-2020 & sold on 1-7-2021

The period of holding of the split shares would be considered as the same as the period of holding of the original shares and the cost of acquisition would be apportioned proportionately.

Selling Price (500*60) 30,000
Cost of Acquisition – Proportioned apportionately (50*25) 12,500
Expenses on Transfer (assumed Nil) Nil
Period of Holding (Considered to be purchased on 1-4-2020 and hold for more than 1 year) Long Term
Capital Gains on sale of original 500 shares Rs. 17500
Tax @ 10% 1,750

Other Relevant Points

  1. While computing Capital Gains, it is always to be assumed that the shares have been sold on FIFO basis i.e. First in First Out. In simple words, it is to be assumed that shares which were purchased first are sold first.
  2. Long Term Capital Gains Tax @ 10% on sale of shares is only levied on Gains exceeding Rs. 1 Lakhs

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.