Share capital is the most popular and convenient source of long term finance for companies. The organizations utilise multiple types of issues to raise public funds from the capital market. The IPOs and FPOs are one of those issues through which a company issue (sell-off) financial securities like equity shares for the investors to subscribe.
The right issue and bonus issue are other types of issues which the companies utilise to raise capital and as cash alternatives in different circumstances.
A rights issue is a way for companies to raise money by offering existing shareholders the chance to buy more shares at a discount. he company’s shareholders have rights to accept or reject the proposal.
On the other hand, bonus shares refer to the shares which are issued free of cost to their shareholders on a specified date by the companies. The bonus shares are issued at a certain proportion (e.g. 1:1 or 2:1 or 3:1) according to the shareholders’ stake in the company.
To understand the concepts clearly, let us study the tax treatment of ordinary shares, bonus shares, and rights shares through a few practical examples
Ordinary shares are shares purchased from the market at a price.
Mr. Rahul buys 100 listed shares of ABC Ltd:
- Purchase price: Rs.200 per share (Jan 2023)
- Sale price: Rs.300 per share (Aug 2024)
Computation of Capital Gain
- Cost = 100 × Rs.200 = Rs.20,000
Sale value = 100 × Rs.300 = Rs.30,000
- Capital Gain = Rs.10,000 (Sal price- Cost of acquisition)
Note: Without indexation as the transfer took place after July 2024
Nature of Gain
Holding period: Jan 2023 → Aug 2024 (> 12 months) – (LTCG (Equity)
Tax Calculation (Section 112A)
| Particulars | Amount (Rs.) |
| LTCG | 10,000 |
| Exemption limit | 1,25,000 |
| Taxable LTCG | Nil |
| Tax @ 12.5% | Nil |
Learning: LTCG up to Rs.1.25 lakh is tax-free.
Rights Shares
Concept: Rights shares are issued to existing shareholders at a concessional price.
Example
Rights offer by SPT Ltd:
- Rights ratio: 1:2
- Issue price: Rs.100 per share
- Rahul subscribes: 50 shares
- Allotment date: Jan 2024
- Sale date: Dec 2024
- Sale price: Rs.250 per share
Cost of Acquisition
Cost = 50 × Rs. 100 = Rs.5,000
Capital Gain
Sale value = 50 × 250 = Rs.12,500
Capital gain = 12,500 − 5,000 = Rs.7,500
Nature of Gain
Holding period: Jan 2024 — Dec 2024 (< 12 months) – (STCG (Equity)
Tax Calculation (Section 111A)
| Particulars | Amount (Rs.) |
| STCG | 7,500 |
| Tax rate | 20% |
| Tax | 1,500 |
Note: Transfer took place after July 2024.
Bonus Shares
Concept: Bonus shares are issued free of cost.
Cost of acquisition = Nil
Holding period = from allotment date
Example
Bonus issue by OCT Ltd:
- Bonus ratio: 1:1
- Bonus shares received: 100 shares
- Allotment date: Feb 2023
- Sale date: Sep 2024
- Sale price: Rs.150 per share
Capital Gain
Sale value = 100 × Rs. 150 = Rs.15,000
Cost = Nil
Capital Gain = Rs15,000
Nature of Gain
Holding period: Feb 2023 → Sep 2024 (> 12 months) — (LTCG (Equity)
Tax Calculation (Section 112A)
| Particulars | Amount (Rs.) |
| LTCG | 15,000 |
| Exemption limit | 1,25,000 |
| Taxable LTCG | Nil |
| Tax @ 12.5% | Nil |
Combined Summary Table
| Type of share | Cost of acquisition | Holding period | Nature of gain | Section | Tax rate |
| Ordinary | Purchase price | From purchase date | STCG / LTCG | 111A / 112A | 20% / 12.5% |
| Rights | Issue price paid | From allotment date | STCG / LTCG | 111A / 112A | 20% / 12.5% |
| Bonus | Nil | From allotment date | STCG / LTCG | 111A / 112A | 20% / 12.5% |