Bonus actions credited to your demat account. Income tax rules in case of sale

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Tax regime for free shares: Earnings season is about to end on Dalal Street and companies have been paying out interim dividends, free shares and share buybacks. As all these forms of benefits are shareholder income, beneficiaries are advised to know the tax rules applicable to these benefits transmitted by listed companies.

According to tax experts, a dividend is additional income passed on by the company as a loyalty benefit. Income tax rules provide that dividends received by a shareholder are added to his net annual income for the financial year concerned and income tax becomes applicable on the basis of the tax bracket on the income in which the taxpayer falls. In the event of a share buyback, no tax is levied on the beneficial shareholders as the tax is paid by the company offering the share buyback.

How is the income from free shares calculated?

In the event of the allocation of free shares, income tax will have to be paid according to its holding period. If the free shares were issued before January 31, 2018, then the cost of the free share would be the close price of the share on January 31, 2018. But, if the free share was issued after January 31, 2018, then the cost of the premium shares would be zero. Income tax on the sale of free shares is calculated on a FIFO (First In First Out) basis.

Speaking on the income tax rules applicable to the sale of free shares, Mumbai-based tax and investment expert Balwant Jain said: “If the free shares were issued before January 31 2018, in this case, the cost of the free share would be close to the price of the share on January 31, 2018. If the free shares were issued after January 31, 2018, then the cost of the free shares would be nil. Jain said the income tax on the sale of free shares is calculated on a FIFO basis.

On how income tax will apply to the sale of the free shares, Harsh Roongta, Head of Fee Only Investment Advisers, said, “If the free shares are sold within one year of the issuance of the free shares , a fixed income tax of 15% will be applied. while the free shares being sold after more than one year of detention, it will be necessary to pay 10% income tax on 1 lakh that this shareholder earned from free shares.”

Asking shareholders to remember a date – January 31, 2018, Harsh Roongta said: “If free shares are issued after this date, the cost of the share will be considered zero and all the money from the sale of free shares will become income for the shareholder. But, in the event that free shares are issued before this date, the cost of the share will then be the closing price of this share on January 31, 2018 So the net income from the free share would be the sale price minus the closing price of the share on January 31, 2018.”

What is FIFO Basic Calculation

Explaining the calculation of FIFO in free share sales, Balwant Jain said, “If a person bought 50 shares of a company and later gets 25 free shares, the net share ownership will become 75 (50 + 25).But, when the shareholder is looking for profit and sells shares of the company, then the shares initially bought will be considered as sold first and the free shares will be considered as sold later. , if the shareholder sells 60 shares, his initial 50 shares purchased will be considered sold first and only 10 free shares will be considered given in. He would continue to hold 15 free shares (25-10).

So when calculating income tax on the sale of free shares, only 10 free shares would come into play, Jain said.

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