Q: I inherited 100 shares of a TCS Ltd in 2007 from my father. The price at which he acquired these shares is not available to me. On 20-4-2009, the company issued bonus shares in the ratio of 1:1, taking my total to 200 shares. Then on 19-4-2018, the company issued bonus shares in the ratio of 1:1, making my total holdings 400. I had not participated in any buyback of the company in the past but accepted @ 50 shares under buyback in March 2022. 4,500. I have sold the remaining 350 shares at the rate of 3364 per share on 5th August 2022. How should the capital gains of these shares be calculated?
Answer: There is no inheritance tax in India, so there was no tax liability on you at the time of inheriting the shares. Also, there is no tax liability when one receives bonus share from a company. It is only when the shares are sold, one has to pay tax as either short term capital gain or long term capital gain, depending on whether the shares are sold for more than 12 months or less than 12 months were kept for the time being.
For inherited property and those received under gift, all to be included in the seller’s holding period starting from the previous owner’s holding period, who actually paid. For property inherited or received as a gift, the cost is also to be taken at the price at which the asset was acquired by the previous owner who actually paid for it. The cost of bonus shares received is to be taken as nil for computing capital gains.
For assets acquired before April 1, 2001, the fair market value as on April 1, 2001 is to be taken as the cost of the asset. However, in case of listed shares (whether purchased or otherwise acquired) held on 31st January, 2018 and sold after 31st March, 2018, the fair market value of the shares as on 31st January, 2018 shall be taken as cost in the case of the holding period is to be taken. more than 12 months.
So in respect of 200 shares (including 100 bonus shares) held by you on 31st January 2018 the fair market value of these TCS shares as on 31st January 2018 i.e. Rs. 3,112.35 is to be taken as cost per share. The cost for bonus shares received by you after this date i.e. on 19-4-2018 will be treated as Nil.
The amount received by you in respect of 50 shares under buyback is completely tax free under section 10(34A) of the Income Tax Act as the company is required to pay tax on the buyback. However, you have to disclose the same under Schedule EI (Exempt Income) while filing your ITR for the assessment year 2022-2023.
The 50 shares accepted under the buyback are to be appropriated from your 100 shares out of the 400 shares originally held on the date of buyback, applying the FIFO (First In First Out) method.
Now the cost of 350 shares sold is calculated as follows:
Out of 50 share holding on FMV as on 31st Jan 2018. 3112.35 per share = 1,55,618
100 Bonus Shares held on 31st January 2018 at an FMV of Rs. 3112.35=3,11235
200 Bonus Shares received as Bonus Shares on 19th April, 2018 = Nil
Total cost Rs. 466,853
Long term capital gain of Rs. 7,10547/- (Sell of 350 Shares @ 3364-Cost Rs.466853).
All listed shares and units of equity oriented schemes taken together will be taxed uniformly at a flat rate of 10% without indexation after initial one lakh long-term capital gains. You can claim exemption from these long term capital gains if you invest the proceeds from the sale to purchase a residential house subject to the satisfaction of the conditions prescribed under section 54F.
Balwant Jain is a Tax and Investment Specialist and can be contacted herejainbalwant@gmail.com and @jainbalwant on Twitter.
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