Important Keyword: Corporate Action, Income Tax.
Table of Contents
Corporate Action: Meaning & Taxation
Corporate actions encompass a range of activities undertaken by companies that can significantly impact their shareholders. These actions may involve changes in stock ownership, organizational structure, or distribution of profits. Examples include issuing dividends, offering bonus shares, granting rights to purchase additional shares, and executing stock splits or consolidations. For individuals holding stocks in such companies, understanding the tax implications during the filing of Income Tax Returns (ITR) becomes crucial.
Each corporate action carries its own set of implications for shareholders, potentially influencing the value of their shares, their ownership stake in the company, and the tax treatment of their investments. Consequently, shareholders must be aware of these implications to ensure accurate reporting and compliance with tax regulations when filing their ITR.
What is a Corporate Action?
A corporate action serves as a pivotal event that instigates significant changes within an organization, impacting its stakeholders, particularly shareholders. Typically initiated by the board of directors and ratified by shareholders, these actions ensure that crucial decisions about the company's trajectory and structure are made with input and consent from its owners. Here are some key corporate actions and their tax implications:
Common Corporate Actions and Their Tax Treatment
Dividends
A portion of the company’s profits distributed to shareholders.
Taxation:
- Dividend income is taxable in the hands of the shareholder.
- Taxed under “Income from Other Sources”
- Applicable at slab rate
- TDS of 10% is deducted by the company if dividend exceeds ₹5,000 in a financial year from a single company.
Stock Split
Division of each existing share into multiple shares to increase liquidity (e.g., 1 share of ₹10 face value split into 2 shares of ₹5 each).
Taxation:
- No tax at the time of split
- On sale, capital gains are computed using adjusted cost basis
- Holding period continues from the original acquisition date
Bonus Shares
Free shares issued to existing shareholders in proportion to their holdings (e.g., 1:1 means one bonus share for every share held).
Taxation:
- Not taxed at the time of receipt
- Taxable at the time of sale
- Cost of acquisition is considered zero
- Full sale proceeds become capital gains
- Holding period starts from the date of allotment of bonus shares
Rights Issue
Company offers additional shares to existing shareholders at a discounted price.
Taxation:
- No tax on receipt of rights
- If rights are renounced (sold to another investor):
- Capital gains tax applies (difference between sale price and nil cost)
- If exercised and shares are purchased:
- The purchase price becomes cost of acquisition
- Holding period starts from the date of allotment
Share Buyback
Company repurchases its own shares from shareholders, often at a premium.
Taxation:
- For listed companies:
- Buyback tax is paid by the company (at 20%)
- Amount received by shareholder is exempt
- For unlisted companies:
- Similar rules apply—buyback tax is paid by the company, and shareholder income is exempt
Merger/Amalgamation
Combining of two or more companies into a single entity.
Taxation:
- No capital gains tax if shares in the merged company are received in exchange for shares in the transferor company (subject to conditions)
- Cost of acquisition and holding period are inherited from old shares
Demerger
Company splits into multiple entities to separate business operations.
Taxation:
- No capital gains tax on receipt of shares in the resulting company
- Cost of acquisition of original shares is apportioned between original and resulting company shares
- Holding period is calculated proportionately
Preference Share Conversion
Conversion of preference shares into equity shares as per the terms.
Taxation:
- No tax on conversion
- Capital gains apply only when converted equity shares are sold
- Cost and holding period carried over from original preference share
Spin-Off
A spinoff marks the separation of a subsidiary from its parent company, leading to the creation of a new, independent entity. During a spinoff, a distinct portion of the parent company is detached, forming a smaller, standalone organization. The spun-off entity gains autonomy and operates independently from its parent, giving rise to its own distinct identity. Shareholders of the parent company receive shares of the spinoff company as special dividends.
Tax Implications of Spinoff:
Spinoff Distribution: When shareholders receive new shares of the spun-off company, there are no immediate tax implications. Sale of Shares: Long-Term Capital Gains (LTCG) exceeding INR 1 lakh are taxable at 10%, and Short-Term Capital Gains (STCG) are taxable at 15%. For Capital Gains computation, the holding period for new shares is the same as that of the original shares.
Example:
In April 2023, Rahul purchased 500 shares of Reliance Industries Limited (RIL). In July 2023, RIL announced the spinoff of its financial services division, establishing a new entity named Jio Financial Services Limited (JFSL). For each RIL share held, Rahul received one share of JFSL. Subsequently, in October 2023, Rahul sold 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 |
How to Report in ITR
Investors must report income or capital gains from corporate actions under the appropriate heads:
| Corporate Action | Head of Income | ITR Schedule |
|---|---|---|
| Dividends | Income from Other Sources | Schedule OS |
| Sale of Bonus/Split Shares | Capital Gains | Schedule CG |
| Rights Renunciation | Capital Gains | Schedule CG |
| Buyback (unlisted) | Exempt Income | Schedule EI |
| Merger/Demerger Sale | Capital Gains | Schedule CG |
Frequently Asked Questions
1. Do I need to pay tax on the dividends I receive from Indian companies?
Answer: Yes, dividends are taxable under “Income from Other Sources” at your applicable slab rate. A 10% TDS is deducted if dividend income from a company exceeds ₹5,000 in a financial year.
2. Is there any tax payable when a company issues bonus shares to me?
Answer: No tax is payable when you receive bonus shares. However, when you sell them, the entire sale value is treated as capital gain since the cost of acquisition is considered zero.
3. Are stock splits taxable under Indian tax laws?
Answer: No, stock splits are not taxable at the time of the split. Capital gains arise only when the shares are sold, and the cost is adjusted accordingly.
4. What are the tax implications if I exercise or sell rights shares?
Answer: Exercising rights shares is not taxable; the purchase price becomes the acquisition cost. If you sell (renounce) your rights, the gain is taxable as capital gains.
5. If a company buys back its shares from me, do I need to pay tax?
Answer: No, for listed and unlisted companies, the company pays buyback tax. The amount you receive is exempt from tax in your hands.
6. How are mergers and demergers treated for tax purposes?
Answer: In a merger or demerger, there's no immediate capital gains tax if you receive new shares. The cost and holding period of old shares carry over to the new ones.
7. Is conversion of preference shares into equity shares taxable?
Answer: No, conversion itself is not taxed. Tax applies only when you sell the converted equity shares, with original cost and holding period taken into account.
8. Do I have to pay tax if I receive shares from a spinoff company?
Answer: No, there’s no tax on receiving shares in a spinoff. But if you sell them, capital gains tax applies—10% for LTCG over ₹1 lakh or 15% for STCG.
Read More: Income Tax on Foreign Shares
Web Stories: Income Tax on Foreign Shares
Official Income Tax Return filing website: https://incometaxindia.gov.in/
