Taxation of Bonus Shares, splitting of Shares & Demerger


Taxation of Bonus Shares, splitting of Shares & Demerger

 Query 1]

  1. I have been allotted the shares of Reliance Jio Financial services free of cost as I was holding shares of RIL. How to calculate the capital gain tax if I sell the shares of Jio Financial services now?
  2. I have held a few shares for more than 10 years which I have never sold. In the case of shares of one company, I have purchased 1000 Shares @ 211/- per share. The company has given the bonus in the ratio of 3:5 in 2017 as a result of which I holding increased to 1600 shares. The face value of the shares originally was Rs. 10/- each and the same is splitted in 2022 to become the face value of Rs. 2/- each. As a result, the total share holding of 1600 got converted into 8000 shares. My question is, if I sell a total of 7000 shares now at a market price of Rs. 115/-, how should I calculate the capital gain tax? Whether the gain would be LTCG & STCG? [kail******]


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 taxable @ 10% on the profit exceeding Rs. 1 Lakh [Section 112A]. 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 is covered by STT, it would be taxable @ 15% u/s 111A. As far as Bonus shares are concerned, its cost of acquisition is considered as nil and the date of holding is the date of allotment of the shares. The splitting of shares doesn’t result in any change in the period of holding and the cost of acquisition is required to be apportioned amongst the splitted shares. With above brief overview, reply to your specific query is as under:


Taxation in case of sale of Shares of RIL or Jio Fin:

Shares of Reliance Jio Financial Services (JioFin) are given to the shareholder of Reliance Industries Ltd as a result of demerger. For every one share of RIL, shareholders are allotted one share of Jio Fin. The original cost of acquisition is now required to be apportioned by each & every investor between RIL & JioFin in the ratio of 95.32% & 4.68% respectively. However, the holding period for a demerged company (i.e., JioFin) needs to be reckoned from the date when the shares of RIL were originally purchased & not from the date of the demerger. In short, if the original holding of RIL has completed a holding period of 12 months, then sale of Jio Fin will be classified as long-term. Taxpayers need to carry out the necessary correction in its books as a result of the demerger of Jio Fin from RIL. All RIL shares have to undergo price reduction in the records of investors as a result of demerger & record the same as cost of Jio Fin.


Tax Treatment of Bonus Share:
In case the company declares Bonus, shareholders get certain additional numbers of free shares against their existing shareholding.  In your specific case, you got 600 shares as bonus against your holding of 1000 shares in the company in 2017.
As far as the tax treatment of bonus shares is concerned, investors may note that mere allotment of bonus shares doesn’t attract any tax liability. 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. The cost of acquisition is treated as Nil in respect of bonus shares allotted on or after 01.04.1981. In your specific case, bonus shares were allotted in 2017 & so the resultant profit would be LTCG only.

Tax Treatment in case of Share Split:
Share splitting is a division of the existing shares into 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 value 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 a stock split is that a shareholder with one share of Rs. 10 each is replaced by Ten Shares of Rs. 1 each or Five Shares of Rs. 2 each or Two Shares of Rs. 5 each.
Whenever the shares are splitted, 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 total cost of acquisition of total shares also remains the same and would be divided amongst the splitted shares.

In your present case, you were earlier holding a total 1600 shares (1000 shares were purchased by you with its cost at Rs. 2.11 Lakh and 600 shares allotted as bonus with its cost considered as nil). These 1600 shares of face value of Rs. 10 each got splitted into 8000 shares of Rs. 2/- each. As a result, the cost of acquisition in your case would be Rs. 2.11 Lakh for 5000 shares (originally purchased shares) and nil for 3000 shares (bonus shares). There is no tax implication involved at the moment of share split.

For computation of capital gain, Income Tax Law requires taxpayers to follow FIFO (First In First Out) method. As a result, your sale of 7000 shares would consist of 5000 originally purchased shares & 2000 bonus shares. The period of holding of in either case exceed 12 months, the entire capital gain would result in LTCG as under:

 Particulars Original Shares Bonus Shares Total
Sale consideration 5,75,000 2,30,000 8,05,000
Less: Cost of acquisition 2,11,000 0 2,11,000
LTCG 3,64,000 2,30,000 5,94,000