Amit Gupta, MD, SAG Infotech, examines the taxation of dividend-paying stocks, share buybacks, and bonus shares.
To reward their long-term investors, several companies have recently announced stock dividends, share buybacks, and the issue of bonus shares. However one should be aware that because these benefits are seen as income by the shareholders, they are subject to income tax.
Tax on equities that produce dividends or interim dividends
According to tax and financial experts, an intermediate or final dividend is an extra income earned by a stock market investor that does not need the sale of portfolio shares. As a consequence, it is seen as extra income by the investors, and at the time of filing an income tax return (ITR), it is added to one's yearly income.
Income tax is then assessed depending on the taxpayer's tax bracket after this addition.
Tax on bonus shares
Bonus shares have no tax liability for shareholders when they are issued to shareholders by the companies but attract tax only when they are sold.
Yet the bonus ratio (like how many bonus shares an investor gets for every share owned) affects how much the market price per share changes.
Tax on share buybacks
Every domestic firm that buys back its own shares is subject to tax at the rate of 20 per cent plus surcharge of 12 per cent plus any relevant cess, according to Section 115QA of the IT Act.
Buyback is subject to a 20 per cent corporate tax on the difference between the share's issue price and the repurchase price.
How are taxes applied on equities that pay dividends, bonus shares, and share buybacks calculated?
In the case of dividend-paying stocks, investors must pay taxes based on their income tax bracket.
As previously noted, the business-level income tax rate of 20 per cent plus cess is used in the event of share buybacks. Moreover, bonus shares have no tax consequences.
How to record these shares in your ITR?
Dividend shares must be reported in the ITR as Income from Other Sources.
Computing tax on bonus shares
Bonus shares should not be included in ITR filings, and when it comes to share buybacks, ITR filings should consist of this information as Exempt Income.
Income tax regulations apply to bonus share sales. Companies award their existing shareholders bonus shares in proportion to their existing shares.
The distribution of bonus shares has no tax implications.
For bonus shares, the holding term is calculated from the date of allotment until the date of sale. When bonus shares are sold, tax is charged at the same rate as it is on regular shares.
Tax is computed when bonus shares are sold. The cost of the bonus shares would be the stock's closing price on January 31, 2018, if the bonus shares were given before that date.
The price of the bonus shares would be zero if they were issued after January 31, 2018.
A flat 15 per cent income tax will be applied if bonus shares are sold within a year of issuance since income tax on bonus share transactions is calculated on a FIFO (First-In-First-Out) basis.
The bonus share beneficiary is required to pay a 10 per cent tax on any income exceeding Rs 1 lakh derived from the issuance of bonus shares if the bonus shares are sold after being held for more than a year.