capital Tax on Bonus shares

anilsharjah · #1 10th July 2006, 10:08 PM

Hi

Please let me know the capital gain tax on bonus shares. If I purchased 100 shares and later i got another 100 shares (1:1) as bonus . I sold only 100 shares and what will be the capital gain tax for this .

anil kumar

aca_trader · #2 10th July 2006, 10:44 PM

Quote:

Originally Posted by anilsharjah

Hi

Please let me know the capital gain tax on bonus shares. If I purchased 100 shares and later i got another 100 shares (1:1) as bonus . I sold only 100 shares and what will be the capital gain tax for this .

anil kumar

It'll be better to illustrate this with an example. Let's say the cost of initial 100 shares was Rs. 1,000 @Rs. 10 per share. Now after you receive bonus shares in the ratio of 1:1, your cost per share will be deemed to be Rs. 5 per share.

Now, when if you sell 100 shares now @ rs. 25 per share, total capital gain will be equal to Rs. (25-5), i.e., rs. 20 per share or Rs. 2,000 in total.

Regards,
--Ashish

pkjha30 · #3 10th July 2006, 11:18 PM

Quote:

Originally Posted by aca_trader

It'll be better to illustrate this with an example. Let's say the cost of initial 100 shares was Rs. 1,000 @Rs. 10 per share. Now after you receive bonus shares in the ratio of 1:1, your cost per share will be deemed to be Rs. 5 per share.

Now, when if you sell 100 shares now @ rs. 25 per share, total capital gain will be equal to Rs. (25-5), i.e., rs. 20 per share or Rs. 2,000 in total.

Regards,
--Ashish

Hi Ashish

For tax calculation purpose treatment for both original shares and bonus shares will be like this.

Cost of acquisition of original shares=purchase price+ STT+ Brokerage +Demat maintenance charges on pro-rata basis.

sell price of shares=sell price-STT - Brokerage

Indexation benefit may also be applied as per the Index given by IT dept.

capitalGains tax=sell price*x-purchase price*x. ( x=number of shares sold)

for period of holding < one year
capital gains tax=capitalGains*10/100

for period of holding>one year
capital gains=Nil if Security Transaction Tax has been paid and transaction was through recognised stock exchanges.

For Bonus share cost of acquition will be treated as Nil.

Date from which stock goes ex- date will be the starting point for calculation of period of holding, even if shares have not come into demat account physically.(you may check on this, as it could be date on which it is credited to your account)

For demat shares FIFO, First In First Out, formula is applied). So if you sell shares after getting bonus shares , original shares will be deemed to be sold.

So in your example cost of acquisition will be 10*100=1000
Sell price will be 25*100=2500
CGTax=2500-1000=1500. if it is LTCG Rs.150 will be tax else it will be nil provided two conditions are satisfied.
Accordingly capital gains will be treated.
This is for investment.

For Business income you will have the option to factor in your business expenses and declare the profit after deducting all your expenses , which may include salaries , running cost of establishment, etc.
Hope it is clear.
Pankaj

aca_trader · #4 10th July 2006, 11:41 PM

Quote:

Originally Posted by pkjha30

Hi Ashish

For tax calculation purpose treatment for both original shares and bonus shares will be like this.

Cost of acquisition of original shares=purchase price+ STT+ Brokerage +Demat maintenance charges on pro-rata basis.

sell price of shares=sell price-STT - Brokerage

Indexation benefit may also be applied as per the Index given by IT dept.

capitalGains tax=sell price*x-purchase price*x. ( x=number of shares sold)

for period of holding < one year
capital gains tax=capitalGains*10/100

for period of holding>one year
capital gains=Nil if Security Transaction Tax has been paid and transaction was through recognised stock exchanges.

For Bonus share cost of acquition will be treated as Nil.

Date from which stock goes ex- date will be the starting point for calculation of period of holding, even if shares have not come into demat account physically.(you may check on this, as it could be date on which it is credited to your account)

For demat shares FIFO, First In First Out, formula is applied). So if you sell shares after getting bonus shares , original shares will be deemed to be sold.

So in your example cost of acquisition will be 10*100=1000
Sell price will be 25*100=2500
CGTax=2500-1000=1500. if it is LTCG Rs.150 will be tax else it will be nil provided two conditions are satisfied.
Accordingly capital gains will be treated.
This is for investment.

For Business income you will have the option to factor in your business expenses and declare the profit after deducting all your expenses , which may include salaries , running cost of establishment, etc.
Hope it is clear.
Pankaj

That depend upon the accounting method whether FIFO or average cost is being used. FIFO is what department has issued a circular about. An asseessee is not bound to be guided by the same. It's always challengeable in the court of law.

Regards,
--Ashish

pkjha30 · #5 10th July 2006, 11:42 PM

Quote:

Originally Posted by aca_trader

That depend upon the accounting method whether FIFO or average cost is being used.

Regards,
--Ashish

For Income tax it is FIFO Only.
Pankaj

aca_trader · #6 10th July 2006, 11:45 PM

Quote:

Originally Posted by pkjha30

For Income tax it is FIFO Only.
Pankaj

Well, I have added something before I could read your post.

The departmental circulars are not biding on the assessee.

Best Regards,
-Ashish

pkjha30 · #7 10th July 2006, 11:54 PM

Quote:

Originally Posted by aca_trader

Well, I have added something before I could read your post.

The departmental circulars are not biding on the assessee.

Best Regards,
-Ashish

Hi Ashish

Thats totally impraticable in demat shares as they are fungible ( you can not distinguish one shares from another shares and all are as good as any other shares held by you) so once added to depository you can not say which shares are sold out. In physical form it is possible and then average cost will not apply. You may challenge in the court of Law but you might loose your profit and capital by paying fee to the lawyer and meeting court expenses.

Average cost method might be adopted for balance sheet or day trading or such other things but not for investment. Untill that circular is overturned by a Court of Law , it is very much binding.

Pankaj

aca_trader · #8 11th July 2006, 12:01 AM

Quote:

Originally Posted by pkjha30

Hi Ashish

Thats totally impraticable in demat shares as they are fungible ( you can not distinguish one shares from another shares and all are as good as any other shares held by you) so once added to depository you can not say which shares are sold out. In physical form it is possible and then average cost will not apply. You may challenge in the court of Law but you might loose your profit and capital by paying fee to the lawyer and meeting court expenses.

Well, today's computing power makes it a matter of seconds.
As a professional I am bound to give best reply. Cost consideration will certainly be taken into account at the later stage. Besides, this simple question is as applicable to person with deep pockets as to small players.

Quote:

Average cost method might be adopted for balance sheet or day trading or such other things but not for investment. Untill that circular is overturned by a Court of Law , it is very much binding.

Pankaj

No circular is ever binding till it's accepted by the court of law. So far courts have even accepted LIFO for Income Tax purpose. Till the day courts say that FIFO will be the only acceptable method, it's not binidng.

Best Regards,
--Ashish

pkjha30 · #9 11th July 2006, 12:27 AM

Hi ashish

LIFO is not average costing. But it might result in loss.Court of Law will only decide a matter if it is disputed before it.Otherwise whatever circular is there will be accepted.Also please read about demat shares.It clearly says it is fungible.

Pankaj

aca_trader · #10 11th July 2006, 12:30 AM

Quote:

Originally Posted by pkjha30

Hi ashish

LIFO is not average costing. But it might result in loss.Court of Law will only decide a matter if it is disputed before it.Otherwise whatever circular is there will be accepted.Also please read about demat shares.It clearly says it is fungible.

Pankaj

In average cost one need not identify units seperately. A lot of manufacturing concerns use it in their inventory taking. One need to take into account the quantity and rate only.

LIFO I have given as example as it's considered to be the least reasonable method in normal conditions and I was just pointing out that even this method has been accepted by the courts so far.

Follow alternative startegy in place of FIFO, department will itself dispute it there.

There is no need to accept any circular by the assessee though it's binding on the department.--- Supreme Court and Several High Courts have decided this from time to time.

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