A corporate action refers to anything a company does that affects its shareholders and usually involves changes in its stocks or how it’s organized. These actions include things like giving out dividends, issuing bonus shares, offering rights to buy more shares, splitting or combining stocks, etc. Each of these events carries substantial implications for shareholders, potentially leading to changes in share value, ownership structure, and taxation. If an individual holds stocks in such a company, then it becomes essential to understand the tax implications while filing an ITR of corporate action.
What is a Corporate Action?
A corporate action refers to a significant activity that brings about substantial changes to an organization and affects its stakeholders, including the company’s shareholders. Such actions are typically initiated by the board of directors and require approval from the shareholders. This process ensures that crucial decisions concerning the company’s direction and structure are made with the input and consent of its owners. Below are some corporate actions listed along with their tax implications.
Buyback of Shares
A buyback is a company’s strategy to invest in itself by buying shares from investors on the open market. Hence, this process results in a decrease in the total number of outstanding shares available for trading. The buyback of shares is an important corporate restructuring method as this method enables the company to repurchase its shares from current shareholders at a predetermined price. As a result, existing shareholders have the option to sell their shares back to the company at the specified issue price.
Taxation on Buyback
As per the Budget 2024 amendment, buybacks made after October 1, 2024, will no longer be taxed at the company level. Instead, shareholders will pay tax on the total amount received as a deemed dividend under Section 2(22)(f). The cost of acquiring buyback shares cannot be offset against this dividend income. However, it will be treated as deemed capital loss and can be carried forward to offset future gains from the sale of remaining shares.
Dividend on Equity Shares and Preference Shares
Companies share their profits with their shareholders by distributing dividends. These dividends can be in the form of cash or stock. Generally, the dividends are issued at regular intervals like quarterly, semi-annually, or annually. Further, both equity shares and preference shares may receive dividends. This dividend income needs to be reported under the head income from other sources by taxpayers.
Taxation on Dividend
- Dividends received from domestic companies are taxable at the applicable slab rates for shareholders.
- Dividends received from foreign companies are subject to taxation at a rate of 20%.
Example
Shreya has received a dividend of INR 500 from MRF Limited and INR 7,500 from Reliance Limited. So now, in her case, she needs to reflect these dividend income under the head IFOS and have to pay taxes at a slab rate on a total dividend of INR 8,000.
Additionally, for the dividend received from Reliance Limited, the company will deduct TDS at a rate of 10%, amounting to INR 750, since the dividend exceeds INR 5,000.
Mergers and Acquisitions
Merger
A merger is a corporate action in which two or more companies come together to create a single new entity. During a merger, companies combine various aspects such as assets, liabilities, and management structure. In this process, the merging companies distribute shares of the newly formed company to their owners based on a predetermined ratio. Consequently, mergers hold the potential to benefit both companies by generating synergies, reducing costs, and expanding market share.
Acquisition
An acquisition happens when one company purchases the majority or all of another company’s shares, assets, or ownership stake, effectively taking control of the acquired company. In the acquisition process, companies can execute it through various methods like directly purchasing shares, merging or exchanging stock. Through this process, the value of shares of the acquired company may rise, while the acquiring company can increase its revenue and market share due to the expansion of operations.
Taxation on Merger and Acquisition
The issue of new shares in exchange for old shares is not a transfer of assets and is thus not taxable. However, the sale of shares is liable to tax as income from capital gains.
- Sale of shares of new company: LTCG is taxable at 12.5% in excess of INR 1.25 lakh under Sec 112A. STCG is taxable at 20% under Sec 111A.
Here, the Cost of Acquisition = Original Purchase Price * Quantity.
The benefit of the grandfathering scheme is not available for new shares that the taxpayer receives in exchange for old shares. Thus, the grandfathering rule as per Section 112A does not apply even if the new shares were allotted before 31st January 2018. - Sale of Shares of the old company: LTCG is taxable at 12.5% in excess of INR 1.25 lakh under Section 112A. STCG is taxable at 20% under Section 111A.
Note: In case of merger and acquisition, the holding period for shares will be calculated from the date when the shares in the original company were acquired until the date when the shares are sold.
Example:
The IDFC Bank and Capital first merged in December 2018, by forming a new company named IDFC First Bank. The companies have agreed to a swap ratio of 139:10. Hence, Akash will get 139 shares of IDFC Bank in exchange for his 10 Capital First shares.
Now, if Akash purchased shares on 01/01/2011 at the rate of INR 10,00,000 and then sold the shares of the new company on 02/02/2022 at INR 25,00,000.
Capital Gains = Sales consideration – Cost of Acquisition = 25,00,000 – 10,00,000 = 15,00,000
As the shares have been held for over 12 months, starting from the acquisition date of the original shares, any capital gains will be termed as long-term and will be taxable at 10% on amounts exceeding 1 lakh INR. Therefore, the tax due will amount to INR 1,40,000 (14,00,000 * 0.1).
However, if the shares were bought on 02/07/2018 and sold on 25/02/2019, the gains of INR 15,00,000 would be termed as short-term capital gains. Consequently, the tax liability would be calculated at a rate of 15%, amounting to INR 2,25,000 (15,00,000 * 0.15).
Bonus Issue
Bonus shares are shares that a company gives to its existing shareholders as a reward without any additional cost. These shares are created from the company’s retained earnings or reserves, and they do not affect the company’s overall market value. However, they increased the number of outstanding sha
Taxation on Bonus shares
- On Issue of Bonus Shares – The bonus shares are not taxable at the time of the bonus issue.
- On Sale of Bonus Shares: LTCG is taxable at 12.5% in excess of INR 1 lakh and STCG is taxable at 20%.
The taxpayer must calculate the period of holding separately for original shares and bonus shares. Further, the taxpayer must calculate the Capital Gains separately for original shares and bonus shares.
The Cost of Acquisition for bonus shares is considered as NIL. Additionally, the holding period for bonus shares commences from the date when these bonus shares are acquired until the date of their sale.
Example:
Bharti acquired 1500 shares of Astral Limited on 15/10/2022 at INR 200 per share. Subsequently, on 14/03/2023, the company issued a bonus in the ratio of 1:3, entitling Bharti to receive 500 bonus shares.
On 07/07/2023, Bharti sold 2000 shares for INR 350 per share. As both the original and bonus shares were held for less than 12 months, capital gains will be treated as short-term. Further, the capital gain tax will be computed separately for the original shares and bonus shares.
| Particulars | For the original 1500 shares | For the bonus of 500 shares |
| Sales Consideration | 5,25,000 (1500 shares * 350 per share) | 1,75,000 (500 shares * 350 per share) |
| Cost of Acquisition | 3,00,000 (1500 shares * 200 per share) | Nil |
| Short-term capital gains | 2,25,000 | 1,75,000 |
Right Issue
A rights issue is a way for companies to raise funds by issuing new shares to existing shareholders at a discounted price. Shareholders can decide whether to purchase new shares or sell their rights to a third party. This allows shareholders to maintain their proportional ownership in the company and participate in its potential growth.
Taxation on the Right Issue
- On Issue of Right Shares: The issue of right shares is not taxable.
- On Sale of Right Shares: LTCG is taxable at 12.5% in excess of INR 1.25 lakh and STCG is taxable at 20%.
The taxpayer must calculate the period of holding separately for original shares and right shares. Further, the taxpayer must calculate the Capital Gains separately for original shares and right shares.
The Cost of Acquisition is the price paid for acquiring the right shares. The taxpayer can add to the purchase value, the amount they pay to acquire the rights entitlement to arrive at the total cost of the acquisition for computing capital gains.
Example:
Mr. Swapnil purchased 2000 shares of Indiabulls Housing Finance Limited for INR 200 per share on 12/12/2023. Subsequently, on 15/02/2024, the company declared a rights issue on a ratio of 1:2 for existing shareholders, priced at INR 150 per share. He opted to exercise this option and acquired 1000 shares at INR 150 each.
On 21/03/2024, he sold 3000 shares at INR 350 per share. As the shares were sold within 12 months, the capital gains will be treated as short-term. Furthermore, the calculation of gains will be conducted separately for the original shares and the right shares.
| Particulars | For 2000 original shares | For 1000 right issue |
| Sales consideration | 7,00,000 (2000 shares * 350 per share) | 3,50,000 (1000 shares * 350 per share) |
| Cost of Acquisition | 4,00,000 (2000 shares * 200 per share) | 1,50,000 (1000 shares * 150 per share) |
| Short-Term capital gains | 3,00,000 | 2,00,000 |
| Tax at the rate of 15% | 45,000 | 30,000 |
Spin-Off
Spinoff refers to the dissolution of a subsidiary business entity from its parent company to form a new smaller independent organization. In a spinoff, a particular section of the parent company is separated from the main business. The spun-off company gets its own unique identity different from the parent company. In this, the existing shareholders of the parent company receive shares of the spin-off company as special dividends.
Taxation for Spin-off
- Spin-Off: When the shareholders of the parent company receive new shares of a resulting company after the spin-off, there would be no tax implication.
- Sale of Shares: LTCG will be taxable at 12.5% in excess of 1.25 lakh and STCG at 20%.
To calculate the Period of Holding for computing Capital Gains, the acquisition date of new shares would be the same as the acquisition date of original shares.
Example:
In April 2023, Rahul acquired 500 shares of Reliance Industries Limited (RIL). In July 2023, RIL announced a spin-off of its financial services division, forming a new entity named Jio Financial Services Limited (JFSL). As part of this demerger, it was declared that for each RIL share held, one share of JFSL would be issued. Consequently, Rahul received 500 shares of JFSL, with a listed value of INR 200 per share on the NSE.
Subsequently, in October 2023, Rahul divested 300 shares of JFSL at INR 700 per share. As the holding period for these shares was less than 12 months, the resulting capital gain will be classified as short-term capital gains.
| Particulars | Amounts |
| Sales Consideration | 2,10,000 (300 shares * 700 per share) |
| Cost of Acquisition | 1,00,000 (500 shares * 200 per share) |
| Short-term capital gains | 1,10,000 |
| Tax at rate 15% | 16,500 |
Stock Split
A stock split is a corporate action in which a company increases the number of its outstanding shares while simultaneously reducing the price per share in proportion to the increase. This action does not affect the market value of the company, but it aims to make shares more affordable for investors and potentially increase liquidity.
Taxation for Stock Split
- Stock Split: The transaction of the stock split is not taxable.
- Sale of Shares: LTCG will be taxable at 12.5% in excess of 1.25 lakh and STCG at 20%.
When computing capital gains, the acquisition date of split shares remains the same as that of the original shares. Further, the cost of acquisition is divided proportionately between the original and split shares to calculate capital gains.
Example:
Arjun had purchased 10 shares of Amazon at the rate of INR 1500 per share in September 2021. Consequently, in March 2022, the company announced a stock split on a ratio of 20:1. As a result, his total shareholding will be 200 shares.
Now, in February 2024, he sold off all his holdings at the rate of INR 2500 per share. Here, the cost of acquisition will be adjusted based on the proportion of stock split.
Total cost of acquisition = 10*1500 = 15000. Now, after stock split the cost of acquisition will be 15000/200 = 75 per share.
| Particulars | Amounts |
| Sales consideration | 5,00,000 (200 shares * 2500 per share) |
| Cost of Acquisition | 15,000 (200 shares * 75 per share) |
| Short-Term capital gains | 4,85,000 |
| Tax at the rate of 15% | 72,750 |
FAQs
When the company issues bonus shares to its shareholders, it is not taxable. When the shareholder sells these shares, it is taxable as capital gains. LTCG is taxable at 10% in excess of INR 1 lac and STCG is taxable at 15%. The taxpayer must calculate the Capital Gains separately for original shares and bonus shares. The Cost of Acquisition in the case of Bonus Shares is NIL.
When the company issues rights shares to its shareholders, it is not taxable. When the shareholder sells these shares, it is taxable as capital gains. LTCG is taxable at 10% in excess of INR 1 lac and STCG is taxable at 15%. The taxpayer must calculate the Capital Gains separately for original shares and right shares. The Cost of Acquisition is the price paid for acquiring the right shares. The taxpayer can add to the purchase value, the amount he/she pays to acquire the rights entitlement to arrive at the total cost of the acquisition for computing capital gains.
When the shareholders of the parent company receive the shares of the resulting company after the spin-off, there would be no tax implication. When the shareholders sell these shares, it is taxable as capital gains. LTCG is taxable at 10% in excess of 1 lac and STCG at 15%. To calculate the Period of Holding for computing Capital Gains, the acquisition date of new shares would be the same as the acquisition date of original shares.
Hey @vivek25, Sale of these right shares, LTCG is taxed at 10% in excess of INR 1 Lakh and STCG is taxed at 15%. The period of holding is calculated from the time the right shares are allotted. The Capital Gains Tax on the sale of Right Shares would be computed in the same manner as Capital Gains on the sale of Bonus Shares except for the fact that in case of Right Shares the cost of acquisition for acquiring the Right Shares would be the price paid for acquiring the right shares. In your case, it will be considered as Short Term Capital Gains since your holding period for these equity shares is less than 12 months.
Lets say, I purchase Rights Entitlement of a company and sell these rights entitlements without applying for the rights issue, what will be the tax implication of profits arising out of sale?
Likewise, if there are any losses arising due to such sale, can these losses be offset against other Short term capital gains?
PS: in the contract note, there does not seem to be STT paid for such transactions.
Hi @balaji, the income that you earned from the sale of Rights Entitlements shall be treated as Income from Other Sources and cannot be offset against other capital gains, as per my opinion of the scenario that you have presented. As there was no ownership of shares, the income gained will be classified under Income from other sources.
Hi, I purchased RE of Suven @ Rs 3 from stock market and further paid rights money @ Rs 55 per share. Cost of acquisition should be Rs 58 per share but zerodha is showing it as Rs 55 only. What should be the cost of acquisition in this case.
Hi @vagrawal
In case of purchase of right shares:
Cost of Acquisition = Amount paid for shares + Amount paid for right entitlement (if any)
Hence, in your case the cost of acquisition will be 58.
Hope this helps!