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TAX PROVISIONS FOR SPECIAL CASES

TAX PROVISIONS FOR SPECIAL CASES

Tax Provisions for Special Cases (Part 1)

  • Definition: Tax provisions for special cases include tax applicability on various transactions such as bonus issues, rights issues, buyback of shares, split, consolidation, mergers, acquisitions of securities, stock lending and borrowing, conversion of bonds or preference shares into equity shares, segregated portfolios in mutual funds, and winding up of mutual fund schemes.
  • Details: The tax treatment of these transactions depends on whether the shares are held as stock-in-trade or as a capital asset.

Key Concept 1: Taxation of Bonus Shares

  • Definition: Bonus shares are additional shares issued by a company to existing shareholders without any additional cost.
  • Details: The tax treatment of bonus shares depends on whether they are held as capital assets or stock-in-trade. If held as capital assets, profits or gains from transfer are taxable as capital gains. If held as stock-in-trade, gains or losses are taxable under the head profits and gains from business and profession.

Key Concept 2: Taxation under the Head Capital Gains

  • Definition: Capital gains are taxable under the head capital gains if bonus shares are held as capital assets.
  • Details:
    • Period of holding: The period of holding of bonus shares is reckoned from the date of allotment. If listed on a stock exchange in India, they are treated as short-term capital assets if held for not more than 12 months, otherwise, they are treated as long-term capital assets.
    • Cost of acquisition: The cost of acquisition of bonus shares is nil in the hands of the original shareholder. However, if bonus shares are issued prior to 01-04-2001, the cost of acquisition can be taken as the fair market value as on 01-04-2001.
    • Sale consideration: The sale consideration is the amount received or receivable by the person transferring the shares.
    • Computation of capital gains: Capital gains are computed by subtracting the cost of acquisition, cost of improvement, and expenditure in connection with the transfer from the sale consideration.

Key Concept 3: Taxation under the Head Profits and Gains from Business or Profession

  • Definition: If bonus shares are held as stock-in-trade, gains arising from their transfer are taxable under the head profits and gains from business or profession.
  • Details: The gains or losses from the sale of bonus shares held as stock-in-trade are calculated by subtracting the cost of acquisition and expenditure relating to the sale from the sale consideration.

Key Concept 4: Taxation on Share Split or Consolidation of Shares

  • Definition: Share split is the process of dividing outstanding shares into smaller shares, while consolidation of shares is the process of reducing the number of shares without reducing the share capital.
  • Details:
    • Taxation under the head capital gains: No tax is levied at the time of splitting or consolidation of shares. Tax implications arise only at the time of sale of such converted shares.
    • Cost of acquisition: The cost of acquisition of shares after consolidation or split is determined with reference to the cost of acquisition of the original shares.
    • Period of holding: The period of holding is reckoned from the date of acquisition of the original shares.

TAX PROVISIONS FOR SPECIAL CASES (Part 2)

  • Consolidation or Splitting of Shares: The cost of acquisition of consolidated or split shares is computed with reference to the cost of acquisition of the original shares. The period of holding for such shares is calculated from the date of acquisition of the original shares.
  • Taxation under the head PGBP: If shares are held as stock-in-trade, gains are calculated only at the time of sale or transfer of the split or consolidated shares. The cost of acquisition is recorded in the books at the cost of acquisition of the original shares.

Taxation of Buyback of Shares

  • Definition: Buyback of shares means the purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies.
  • Taxation: With effect from 1st October 2024, buyback proceeds received by shareholders are taxed as dividend under the head 'income from other sources'. The cost of acquisition of shares bought back is treated as a capital loss.
  • Example: Mr. X invested in 10,000 shares of ABC Ltd. at Rs. 100 per share. The company bought back 500 shares at Rs. 125 per share. The amount received on buyback (Rs. 62,500) is taxed as dividend, and the cost of acquisition (Rs. 50,000) is treated as a long-term capital loss.

Taxation of Rights Issues

  • Definition: A rights issue is a way of raising additional capital by giving existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.
  • Taxability at the time of renunciation of right: The cost of acquisition of the rights so renounced is nil. The period of holding is reckoned from the date of offer to the date of renouncement. The sale consideration is the amount received or receivable by the person renouncing the right.
  • Taxability at the time of sale of shares: Capital gains arise in the hands of the shareholder at the time of sale of such shares. The cost of acquisition of the right shares is the price paid by the shareholder for their acquisition.

Taxation in case of Mergers & Acquisitions

  • Definition: Merger is the voluntary fusion of two companies either by closing the existing companies and making a new one or by one company absorbing the other company.
  • Taxation: The term merger and acquisition is not specifically defined under the Income Tax Act. However, the taxation of mergers and acquisitions is governed by the provisions of the Income Tax Act.

TAX PROVISIONS FOR SPECIAL CASES (Part 3)

  • Amalgamation: Under the Income Tax Act, amalgamation is defined as the merger of one or more companies with another company or the merger of two or more companies to form one company.
  • Conditions for Amalgamation:
    • All the property of the amalgamating company immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation.
    • All the liabilities of the amalgamating company immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation.
    • Shareholders holding not less than 75% in value of the shares in the amalgamating company become shareholders of the amalgamated company by virtue of the amalgamation.

Taxability at the Time of Allocation of Shares

  • No Tax Implication: If shares are held as capital asset, there will be no tax implication in the hands of the shareholder at the time of allotment of shares of the amalgamated company.
  • Taxable under Business or Profession: If shares are held as stock-in-trade, income arising at the time of such exchange shall be taxable under the head profit and gains from business or profession.

Taxability at the Time of Transfer of Shares

  • Capital Gains: If shares acquired in the amalgamated company are held as capital asset, the profits from its transfer shall be taxable under the head capital gains.
  • Business or Profession: If shares are held as stock-in-trade, the profit or losses arising from the transfer shall be taxable under the head profits and gains from business or profession.

Shares Held as Capital Assets

  • Cost of Acquisition: The cost of acquisition of the shares acquired in the amalgamated company shall be the amount paid by the shareholder at the time of acquisition of original shares of the amalgamating company.
  • Period of Holding: The period of holding is reckoned from the date of acquisition of original shares in the amalgamating company.

Shares Held as Stock-in-Trade

  • Fair Value: Fair value of securities acquired under the scheme of amalgamation, i.e., shares of amalgamated company, shall be treated as actual cost of such securities while determining such income.

Taxation in Case of Stock Lending and Borrowing

  • Definition: Stock Lending and Borrowing (SLB) is a system wherein a person can lend his securities to a borrower through approved intermediary for a specified period.
  • Benefit to Lender: The benefit of SLB for lender is that it provides incremental return on an idle portfolio.
  • Benefit to Borrower: A borrower can borrow securities to cover his short-positions, avoid settlement failure or for arbitrage or hedging strategies.

Taxability in Hands of Lenders

  • No Transfer: Any lending of scrips or security is not treated as exchange even if lender does not receive back same distinctive numbers of scrip or security certificate.
  • Taxable under Business or Profession: The fee earned from lending business shall be taxable under the head ‘profits and gains from business or profession’ or ‘Income from other sources’.

Taxability in Hands of Borrowers

  • Capital Gains or Business Income: Any gains or losses arising to the borrower from the sale of such shares shall be taxable under the head capital gains or PGBP, as the case may be.
  • Deduction of Lending Fee: The fee paid by the borrowers may be claimed as deduction while computing the income under capital gains or PGBP.

TAX PROVISIONS FOR SPECIAL CASES (Part 4)

  • Taxation of Special Cases: The section discusses tax provisions for special cases such as conversion of preference shares into equity shares, segregated portfolios of mutual funds, consolidation of mutual fund schemes or plans, and winding up of mutual funds.
  • Conversion of Preference Shares:
    • Definition: Conversion of preference shares into equity shares is not considered a transfer under Section 47(xb) of the Income Tax Act.
    • Details: The cost of acquisition of the equity shares shall be the same as that of the preference shares, and the period of holding shall be reckoned from the date of acquisition of the preference shares.
  • Segregated Portfolios of Mutual Funds:
    • Definition: Segregated portfolios are created by mutual funds to separate debt and money market instruments from the main portfolio.
    • Details: The taxability of income from transfer of units in segregated portfolios is similar to that of normal mutual funds, with the period of holding and cost of acquisition computed based on the original units held in the main portfolio.
  • Consolidation of Mutual Fund Schemes or Plans:
    • Definition: Consolidation of mutual fund schemes or plans is not considered a transfer if it is between two or more schemes of equity-oriented funds or two or more schemes of funds other than equity-oriented funds.
    • Details: The period of holding and cost of acquisition of the consolidated units shall be computed based on the original units held in the consolidating scheme or plan.
  • Winding up of Mutual Funds:
    • Definition: Winding up of mutual funds involves the transfer of units held by unit-holders in consideration of allotment of units in another scheme.
    • Details: The taxability of income from transfer of units in the winding up of mutual funds is similar to that of normal mutual funds, with the period of holding and cost of acquisition computed based on the original units held in the wound-up scheme.

TAX PROVISIONS FOR SPECIAL CASES (Part 5)

  • Winding Up of a Mutual Fund Scheme: A close-ended scheme shall be wound up on the expiry of its duration, unless it is rolled over for a further period. A scheme can also be wound up after repaying the amount due to unit holders in certain circumstances, such as:
    • Event Requiring Winding Up: If an event occurs that requires the scheme to be wound up, as decided by the trustees.
    • Unit Holder Resolution: If 75% of the unit holders pass a resolution to wind up the scheme.
    • SEBI Direction: If the SEBI directs the winding up of the scheme in the interest of the unit holders.
  • Procedure for Winding Up:
    • Notice: The trustees shall give notice to the SEBI and in two daily newspapers having circulation all over India, and a vernacular newspaper circulating at the place where the mutual fund is formed.
    • Cease of Business Activities: The trustee or asset management company shall cease to carry on any business activities, create or cancel units, and issue or redeem units in the scheme.
    • Meeting of Unit Holders: The trustee shall call a meeting of the unit holders to approve the winding up of the scheme by simple majority.
    • Disposal of Assets: The trustee or authorized person shall dispose of the assets of the scheme in the best interest of the unit holders.
    • Payment to Unit Holders: The proceeds of the sale shall be utilized to discharge liabilities, and the balance shall be paid to the unit holders in proportion to their interest in the assets.
  • Delisting of Units: The units of a mutual fund scheme shall be delisted from a recognized stock exchange in accordance with SEBI guidelines.
  • Tax Implications: The amount received on winding up of a mutual fund scheme shall be treated as a normal redemption amount.
  • Tax Rates:
    • Individual or HUF: Normal tax rates apply, with surcharge and health and education cess applicable.
    • Special Tax Rates: Apply to certain types of income, such as capital gains, interest income, dividend income, and other income from securities.
    • Surcharge: Applicable to certain types of income, with rates varying based on the total income range.
    • Health and Education Cess: Calculated at the rate of 4% of the income tax and surcharge.

TAX PROVISIONS FOR SPECIAL CASES (Part 6)

  • Section 115BBE: Applies to any person with undisclosed income as referred to in Sections 68, 69, 69A, 69B, 69C, and 69D, with a tax rate of 60%.
  • Section 115BBH: Applies to any person with income from the transfer of any Virtual Digital Asset (VDA), with a tax rate of 30%.
  • Section 115BBJ: Applies to any person with income by way of winning from Online Games, with a tax rate of 30%.

Exemptions under Income Tax Act

  • Income exempt under the head 'Salary':
    • Section 10(5): Leave Travel Concession, not available in the new tax regime.
    • Section 10(7): Allowance/perquisites to Government employee for rendering service outside India, available in the new tax regime.
    • Section 10(10): Gratuity, available in the new tax regime.
    • Section 10(10A): Pension, available in the new tax regime.
    • Section 10(10AA): Leave Salary, available in the new tax regime.
    • Section 10(10B): Retrenchment Compensation, available in the new tax regime.
    • Section 10(10C): Voluntary Retirement Compensation, available in the new tax regime.
  • Income exempt under the head 'Capital Gains':
    • Section 10(10D): Any sum received under a life insurance policy, except certain life insurance policies.
    • Section 10(37): Capital gains on compulsory acquisition of urban agricultural land.
  • Income exempt under the head 'Income from other sources':
    • Section 10(4)(i): Interest on notified securities and bonds.
    • Section 10(4)(ii): Interest on NRE account.
    • Section 10(11): Amount received from public provident fund, subject to prescribed limit.
    • Section 10(11A): Amount received from Sukanya Samriddhi Account.
    • Section 10(12A): Payment from the National Pension Scheme.
    • Section 10(12B): Partial withdrawal from NPS.
    • Section 10(15): Interest on specified securities as prescribed.
  • Income exempt for certain specified assessees:
    • Section 10(2): Amount received by member of HUF.
    • Section 10(4G): Income of a non-resident arising from portfolio of securities or financial products, managed through IFSC.
    • Section 10(23FC): Income of a Business Trust.
    • Section 10(23FCA): Certain income of a business trust, being a real estate investment trust.
  • Income exempt in the nature of distributed Income:
    • Section 10(4E): Income distributed by an IFSC banking unit to a non-resident.
    • Section 10(23FBB): Income referred to in section 115UB of a unit holder of an investment fund.
    • Section 10(23FBC): Income received by a unit holder of Category III AIF.
    • Section 10(23FD): Certain distributed Income of a Unit Holder from the Business Trust.
    • Section 10(35A): Income of an investor received from a securitisation trust.

Cost Inflation Index

  • The Cost Inflation Index (CII) is used to compute the indexed cost of acquisition and indexed cost of improvement of a long-term capital asset.
  • The CII for every year is notified through an official gazette each year.
  • The table provides the CII for each financial year from 2001-02 to 2024-25.

TAX PROVISIONS FOR SPECIAL CASES (Part 7)

  • Long Term Capital Gain: Long term capital gain u/s 112A is Nil for sale of shares.
  • Tax Calculation:
    • Sale consideration: Rs. 14,00,000
    • Less: Cost of acquisition (FIFO method): Nil
    • Long term capital gain: Rs. 14,00,000
    • Less: Initial limit allowed as exemption u/s 112A: Rs. 1,25,000
    • Taxable long term capital gains u/s 112A: Rs. 12,75,000
  • Rebate u/s 87A:
    • Computation of tax rebate u/s 87A for FY 2024-25
    • Income: Other than income at special rates
    • Deduction: u/s 80C (PPF contribution available in old tax regime)
    • Net Total Income: Rs. 3,25,000 (X) and Rs. 5,25,000 (A)
    • Rebate: Rs. 3,750 (X) and Rs. 11,250 (A)
  • Marginal Relief u/s 87A:
    • Calculate income in excess of Rs. 700,000 (for FY 2024-25) or Rs. 12,00,000 (for FY 2025-26)
    • Calculate tax on total income
    • Marginal relief = Total tax minus the income exceeding the threshold
  • Income from Other Sources:
    • Gift Taxability: Gifts from non-relatives are taxable under section 56(2)(x) if the amount exceeds Rs. 50,000
    • Marriage Gifts: Gifts received on occasion of marriage are not considered as taxable as per the provisions of section 56(2)(x)
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