Issues in taxation

Query 1]

I am holding a BSE listed shares since last 28 months. In current month, company has given Bonus share in the ratio of 5:1 & also splited share of face value Rs. 10 each to face value of Rs. 1 each. Now, Jinx is suppose my client is having 500 shares, he got 100 shares as bonus & after splitting now he is holding 6000 shares. 500 shares were purchased at Rs. 15 per share & before bonus /splitting, shares rate were Rs. 80. Now share price is Rs. 9 after bonus & split. My question is, if I sell total 6000 shares at market price of Rs. 9, how should I calculate LTCG & STCG? [ *****@ca*****.com] Issues in taxation

Opinion:

Taxation of Shares:

Any profit arising on sale of shares which are held for a period of more than 12 months is considered as Long Term Capital Gain (LTCG) & if the transaction of sale is covered by payment of securities transactions tax (STT),it would be totally exempt from tax u/s 10(38) of the Income Tax Act-1961. However, if the shares are sold within a period of 12 months then the profit would be treated as Short Term Capital Gain (STCG) & if the transaction of sale is covered by payment of securities transactions tax (STT), it would be taxable @ 15% u/s 111A.

 Issues in taxation

Tax Treatment of Bonus Share:
Thinking about Bonus is always pleasure. So is the case with Bonus shares. Company do declare bonus shares whereby shareholder gets certain additional numbers of free shares against their existing shareholding.  Like in the above query, holder of 500 shares got 100 additional shares (5:1) as a result of company declaring bonus.
As far as the tax treatment of bonus shares is concerned, investor should note that
a] Mere allotment of bonus shares doesn’t attract any tax liability.
b] the date of holding of bonus shares is recognized from the date of allotment of bonus shares and not from the date of holding of the original shares.
c] The cost of acquisition is treated as Nil in respect of bonus shares allotted on or after 01.04.1981.

If the bonus shares are sold through recognized stock exchange after a holding period of more than 12 months, entire amount would be exempt [u/s 10(38]). However, if the bonus shares are sold within 12 months, then the amount would be treated as Short term Capital gain and would be taxable @ 15% u/s 111A. In short, though allotment of bonus shares may be good news, its tax treatment may not be so if the same are sold within a period of 12 months from the date of its allotment.

Tax Treatment in case of Share Split:
Share splitting is a division of the existing shares in to a smaller lot wherein the cost of each split share is computed in the same proportion of the cost of the original shares as the face value of the split share bears to the face value of the original shares. In the recent past, splitting of shares has become common. Many existing listed companies who found their high share prices as a deterrent for prospective investors have reduced the face of their shares from Rs. 10 per share to Rs. 1 per share or Rs. 2 or Rs. 5 Per Share. The result of such stock split is that a shareholder with one share of Rs. 10 each is replace by Ten Shares of Rs. 1 each or Five Shares of Rs. 2 each or Two Shares of Rs. 5 each.

Whenever the share are splitt, the date of acquisition remains the same as the date of acquisition of original shares. Splitting of shares doesn’t change the period of holding of such assets. Resultantly, the date of splitting doesn’t change the period of holding of shares. The cost of acquisition of total shares also remains the same. For example, in the present query 500 Shares were purchase by the investor for Rs. 7,500/-. 500 Shares of Rs. 10 each were later on split in to 5000 shares of Rs. 1 each. The cost of acquisition in such case would be considered as Rs. 7,500/- for 5000 shares (i.e., Rs. 1.50 per share). In short, there is no tax implication involved at the moment of share split.

In your specific case, the cost of acquisition of original 5000 shares would be Rs. 7,500/- (5000 Shares @ 1.50 per share) & 1000 Shares would be Nil. The sale price would be Rs. 45,000/- for 5000 shares & Rs. 9,000/- for 1000 shares.  Surplus of Rs. 37,500/- from sale of original 5000 shares (i.e., 500 shares prior to splitting) would be tax free u/s 10(38) as it has a holding period of more than 12 months. The tax treatment of profit arising on sale of bonus shares would depend upon its holding period. If the bonus shares are sell after a holding period of more than 12 months, entire amount would be tax free u/s 10(38). If however it is sell within a period of 12 months, the amount would be taxable @ 15% u/s 111A.

Query 2]

I am 77 years old. I purchased a flat on 23^rd March 2006 for Rs. 4 Lacs and sold the same on 8^th Dec. 2015 for 12 Lacs. My annual income F.Y 2015-16 will be Rs. 1.50 Lacs. My queries are:

1. Am I liable for Capital Gain? What will be my Tax liability?
2. What will be the Indexation value and how it as determined?
3. Can Capital Gain be adjust in my Exemption limit?

[Satish Kumar, Bhopal via – ravi.lodhi1@gmail.com]

Opinion:

1. Computing Long Term Capital Gain (LTCG) on sale of Flat:
   Cost Inflation Index (CII) for FY 2006-07 (year of flat purchase) & FY 2015-16 are “519” & “1081” respectively. Your purchase price was Rs. 4 Lacs. You can further add the stamp duty, registration fees & other expenses incurred while purchasing the flat to arrive at the cost of acquisition. Ignoring stamp duty etc, your index cost of acquisition would be Rs. 8.33 Lacs (Rs. 4 Lacs*1081/519). Your sale price is Rs. 12 Lacs and if it is higher than the stamp duty valuation of the property, then LTCG would be Rs. 3.67 Lacs (Rs. 12 Lacs less Rs. 8.33 Lacs). However, if stamp duty valuation is more than Rs. 12 Lacs, the LTCG would be require to be compute by taking such higher value as sale consideration.
2. You are a senior citizen, eligible for basic exemption limit of Rs. 3 Lacs in the FY 2015-16. You have other income of Rs. 1.50 Lacs. Unutilized Basic exemption limit of Rs. 1.50 Lacs (i.e., Rs. 3 Lacs less other income of Rs. 1.50 Lacs) could be utilize by towards reducing LTCG amount. Resultantly, your taxable LTCG would be Rs. 2.17 Lacs only (i.e., Rs. 3.67 Lacs less Rs. 1.50 Lacs)
3. LTCG is taxable at a special rate of 20% plus education cess.