Suppose company’s shares are quite illiquid. Reason for illiquidity can be many but we are not bothered about that right now. At this point of time, company announces 1:1 bonus share. Since number of shares gets doubled in the market, supply of shares increase, resulting in a downward pressure on the stock price. Now, as the stock is available at cheaper valuation, more buyers get interested in it and hence liquidity improves.
Your email address will not be published. Required fields are marked * Bonus shares are new shares issued to existing shareholders of a company. These shares are issued to the shareholders in proportion of their current holdings. For example, the company may announce one bonus share for every share held by an investor. As the investor after bonus issue holds two shares (1 original share and 1 bonus share), EPS gets halved. Hence bonus share do not affect total EPS of investor. Bonus shares are considered free shares as their cost of acquisition is taken as zero, although they are not free in true sense. Dividends are one of the most important sources of earning for long term investors who invest in stocks. Companies declare dividends in two forms i.e. cash dividend and stock dividend (Bonus shares). Cash dividends are tax free in the hands of investors as company declaring the dividend pays dividend distribution tax on it. There is less clarity regarding tax implication of bonus shares / stock dividends. In this article, we will discuss the tax treatment of bonus shares. What about Cost of Acquisition to be taken at Fair Market Value as per Section 55(2) of the Income-tax Act, 1961 amended by Finance Act 2018?
It must be noted here that long term capital gain tax on transfer of shares would be payable @10% from Financial Year 2018-2019. I do not seem to agree with you. When you sell separately, cost of acquisition of original shares does not get averaged out as indicated in your example for the simple reason that the cost of acquisition of bonus shares remains zero. In your example the shareholder is paying tax on averaged cost. Thus he is paying more tax. In your example his income under the head Short Term Capital Gain on original 100 shares will be (60×100 – 100 x100) = -4000 (Short Term Capital Loss). [email protected] Source: InvestmentYogi is one of the leading personal finance websites in India Cost of acquisition of bonus shares is taken as zero hence the capital gain on selling a bonus share is equal to its selling price.
Total number of shares held post bonus is 200 and let’s say investor sells 100 shares @ 60 before one year. Taxable short term capital gain would be as under – Iam NRI and my family lives in India in a rented house . Is the house rent I pay in India exempted under any provison of IT act ? Regards, An Indian subsidiary of a foreign company (Pvt.Ltd Co.) declared bonus shares(1:1) and decided to stop the business. After paying off all liabilities, decided to apply for liquidation of the company. Can the foreign company take the capital brought in plus bonus shares without paying tax? Copyright © TaxGuru. All Rights Reserved. Maintained by V2Technosys.com All that this article says is that if you sell a share within one year of its purchase (or allotment, in the case of bonus shares), the entire amount of capital gain is taxable as a short term capital gain. Therefore, it is better to sell a share after holding it for at least one year (to qualify it as a long term holding), provided it is sold through a stock exchange and Securities Transactions Tax is paid on this sale transaction. (The requirement about selling through a stock exchange is important but has not been mentioned.)