A company whether it is a private limited company or a limited company has many options to receive capital from its existing shareholders. A company can issue bonus shares or right shares to its existing equity or preference shareholder. Alternatively, the company can also buybacks its share when it is necessary to improve the condition of the financial statement of the organization. Issue a bonus share or right share is a subject matter of approval of the board of directors and shareholders. In this blog, we will discuss about the right shares in detail and their treatment under the income tax act.
What is Right share:
The issue of the Right share is a decision of the board of directors where further approval of the necessary authority is required. When a company registered in gurgaon needs additional capital, it issues equity shares or preference shares to its existing shares holders at discount. The right shares are issued only to the existing shareholder at a discounted price which is less than the market price of the company.
Right share is an offer given by the company to its equity or preference shareholders to buy the company additional shares at a discounted price if they see any future growth in the company in gurgaon.
Why Right share is issued?
When a company requires additional capital for the growth of the business, it finds different ways to receive funds for the expansion of the business. Right Share is one of the best ways that the majority of companies opt to raise additional capital. There are various reasons to issue the right shares like, maintaining a debt-equity ratio or other financial ratios or paying off debts, etc.
What are the conditions and procedures to issue right shares:
The conditions and procedures are prescribed under the companies act 2013, where a company registered in Gurgaon has to issue an offer letter to its existing shares, prescribing the period of acceptance of the offer. If the offer of the right share is not accepted within the period prescribed in the offer letter, it shall be deemed that the offer has been declined by the shareholder to whom it has been issued.
It is to be noted that the right of offered shares can be renunciate to the other person, whether he is an existing shareholder or not.
The companies act prescribes the procedures in detail that every company including private limited companies in Gurgaon should follow for the issue of right shares. The procedure includes;
- issuing an offer letter,
- conducting a Board meeting of directors,
- sending the offer letter through speed post or registered post,
- filing form MGT-14,
- receiving money from shareholders,
- filing form PAS-3 for allotment of shares through ca in Gurgaon which should be attached with a list of the allottee and board resolution,
- make an entry in the register of member
- issue share certificates to shareholders in Form SH-1 and
- pay stamp duty on the issue of shares.
What is income tax treatment on the selling of Right Shares?
Any profit and gain arising from sale of the share of right share whether it is equity shares or preference shares will be treated as short-term capital gain or long-term capital gain based on the holding period of the right shares.
a. Cost of acquisition of right share:
The acquisition cost of right shares shall be the actual amount paid for acquiring the shares. It should be noted that acquisition cost should not be taken as the market value of shares. The only price paid on acquisition is taken as the cost of acquisition.
b. Cost of acquisition if right is renounced:
The cost of acquisition in case of right is renounced by the taxpayer in favor of other person is Nil
c. Determine the holding period of holding of Right Share:
To determine the holding period of the right share you can refer to our article Determine the period of holding for Capital assets. We have discussed in detail about the period determination ways and the type of capital assets to which it is applied.
How Income Tax is calculated on Right Shares?
The selling of right share is taxable under the head of Capital gain unless it is treated as the business of the taxpayer. The selling price of the right share is subtracted from the cost of acquisition and the value arrived is a capital gain. Let us understand this with a simple example:
Mr Ram is an individual living in Gurgaon. He has been issued 100 right shares at the price of Rs.80 per share. During the financial year he sold all of his shares at the price of Rs.120 per share. He sought to advise a chartered accountant in Gurgaon to determine his profit and tax on the gain. The Chartered accountant computed his gain is given below:
- Selling price (100×120) = 12,000
- Less: Cost of acquisition (100×80) = 8,000
- Capital gain (a-b) = 4,000
The Rs. 4000 will be the capital gain of Mr. Ram
What is the income tax rate on Right share.
- Short-term capital gain: In case of listed equity shares the Income tax rate is 15% on the selling of right shares.
- Long-term capital gain: In the case of listed equity shares there is no income tax up to the capital gain of Rs.1 lakh. The long-term capital gain over Rs.1 lakh is taxable at the rate of 10% without indexation. In the case of unlisted shares prescribed under section 112 of the income tax, the income tax rate is 20%.
Determination of cost of acquisition of the right share is important and taxing the right share is equally important. It is advisable to seek the advice of an income tax consultant to pay the correct income tax and report it in the income tax return. It is seen that taxpayers either forget to report in the income tax return or report in a different way which is not correct. Hence taking the advice of an income tax consultant is important unless a taxpayer is well aware of the income tax provisions.
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Read our previous blogs on
1. Capital gain not to be charged on investment in NHAI and REC bonds
2. Documents That Should be Up-To-Dated and Handy for Filing of Income Tax Return
3. Capital Gain in case of Compulsory Acquisition of an Asset