[ad_1]

Income tax rule on bonus shares

Results season is about to end on Dalal Street and companies have been showering interim dividends, bonus shares and buyback of shares. As all these forms of benefits are shareholders’ income, beneficiaries are advised to know the income tax rules applicable on these benefits passed on by the listed companies.

According to income tax experts, a dividend is an additional income being passed on by the company as loyalty benefit. Income tax rules suggest that dividends received by a shareholder is added to its net annual income of the concerned financial year and income tax becomes applicable on the basis of income tax slab in which the taxpayer falls. In the case of buyback of shares, no  tax is levied on the beneficiary shareholders as the tax is being paid by the company offering buyback of shares.

How income on bonus shares is calculated?

In the case of bonus share issue, one will have to pay income tax on the basis of its holding period. If the bonus shares have been issued before 31st January 2018, then cost of the bonus share would be close price of the stock on 31st January 2018. But, in case the bonus share has been issued after 31st January 2018, then cost of the bonus shares would be zero. Income tax on bonus shares’ sale is calculated on FIFO (First In First Out) basis.

Speaking on income tax rules applicable on bonus shares’ sale, Mumbai-based tax and investment expert Balwant Jain said, “If the bonus shares have been issued before 31st January 2018, then in that case cost of the bonus share would be close price of the stock on 31st January 2018. If the bonus shares have been issued after 31st January 2018, then cost of bonus shares would be zero.” Jain said income tax on bonus share sale is calculated on FIFO basis.

On how income tax will be applicable on selling of the bonus shares, Harsh Roongta, Head at Fee Only Investment Advisers said, “If the bonus shares are sold within one year of bonus share issuance, then flat 15 per cent income tax will be applied whereas bonus shares being sold after holding it for more than one year of holding, one will have to pay 10 per cent tax on income over 1 lakh that shareholder has earned from the bonus shares.”

Asking shareholders to remember a date — 31st January 2018, Harsh Roongta said, “If bonus shares are issued after this date, then cost of the stock will be considered zero and entire money coming from the bonus share sale will become income of the shareholder. But, in case, bonus shares are issued before this date, then cost of the stock will be close price of that stock on 31st January 2018. So, net income from the bonus share would be selling price minus close price of the share on 31st January 2018.”

What is FIFO basis calculation

Explaining the FIFO calculation in bonus share sales, Balwant Jain said, “If a person has bought 50 shares of a company and later he gets 25 bonus shares then net shareholding of the stock will become 75 (50+25). But, when the shareholder goes for profit-booking and sells company shares then initially bought shares will be considered sold out first and bonus shares will be considered sold out later. So, if the shareholder sells, 60 shares, then his initial 50 bought shares will be considered sold first and only 10 bonus shares will be considered sold. He would continue to hold 15 bonus shares (25-10).”

So, while calculating income tax on bonus share sale, only 10 bonus shares would come into play, said Jain.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint.
Download The Mint News App to get Daily Market Updates.

More
Less

Subscribe to Mint Newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.

[ad_2]

Source link