How proposed tax on long-term capital gains will be calculated for bonus, rights issue shares

The income tax department has issued FAQs on the proposed tax on long-term capital gains (LTCG). Along with answering questions on how long-term capital gains will be calculated, the FAQs also touch upon how rights and even bonus issues will be taxed from April 1, 2018. 

According to the FAQs released by the department, the fair market value (FMV) will be taken into account for the purpose of calculation of cost of acquisition (CoA) to compute tax on LTCG for bonus shares and and rights issue shares issued on or before January 31, 2018. The FMV of the stock will be taken as the highest price quoted on a recognised stock exchange on January 31, 2018. 

Pinky Khanna, tax director, EY India says, "Going by the initial reading, the FAQs suggest that the highest price of a particular stock as on January 31, 2018 will be taken to calculate the FMV of the stock. For instance, if opening price of stock X on January 31, 2018 was say Rs 100, closing price was 110 but the highest trading price on that day was Rs 120, then Rs 120 would be considered as FMV for computing LTCG." 

Bonus shares are issued by a company without taking any consideration from the shareholders, i.e., a shareholder does not pay money to the company to acquire those shares. Similarly, shares in rights issues are given at a discounted price from the market to existing shareholders. 

According to the newly inserted section 112A of the Income Tax Act, the  CoA will be calculated as the higher of: 

a) the actual cost of acquisition of such asset; and 

b) lower of- 

i) fair market value of such asset as on January 31, 2018; and 

ii) the full value of consideration received or accruing as a result of the transfer of the capital asset. 

The calculation can be explained with the examples below: 

In case of bonus shares 

Let us say you received a bonus share on January 1, 2017 and the FMV of that share as on January 31, 2018 was Rs 150. You then sold this share on May 2, 2018 for Rs 200. 

The calculation of CoA is a two-step process. In the first step, we have to take the lower value between FMV as on 31 January, 2018 (Rs 150) and sale price (Rs 200) - in this case it is Rs 150, which we can call A. In the second step, we have to take the higher value between A (Rs 150) and purchase price (0), which is Rs 150. 

Here the purchase price is taken as zero because no money is paid to acquire the bonus shares. 

LTCG will be Rs 200 less Rs 150, which is equal to Rs 50. 

In case of rights issue 

Here, let us say you have bought a share at Rs 120 on January 1, 2017. The FMV of that share as on January 31, 2018 was Rs 150. You then sold it on May 2, 2018 for Rs 200. 

The CoA will be calculated in the same way as it was done for bonus shares. First we have to take lower of the FMV (Rs 150) and sale price (Rs 200) which is Rs 150. Then between A (Rs 150) and buying price (Rs 120) we have to take higher price, which is Rs 150. 

Here LTCG will be Rs 50 (Rs 200 minus Rs 150). 

Under the new tax regime, a person who sells his bonus shares after holding it for a minimum of 12 months will be liable to pay tax on the amount received as he has not paid any consideration to receive the same, provided they are received by him on or after February 1, 2018, adds Khanna. 

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