Recently, I happened to look at a stock which was bought long back and forgotten. For a moment I thought that the price has doubled since then, so possibly I can exit the position. Since the stock was bought before one year, even if I sell, it would be considered as long term capital gains on equity and would not be taxed at all.
I was wrong.
I remember I bought 50 shares, but now I had 100 shares, when I looked at the corporate actions, I realised that the company has recently issued a 1:1 bonus. So, if you had 1 share, now you will have 2 shares - accordingly the stock price would also have halved. The total value of my position is still at a gain, but because of the bonus shares - not all will be treated as LTCG (Long Term Capital Gain)
Here it goes
2011 - Bought 50 Shares - Price 40 => Rs 2000
2016 - Have 100 Shares - Price 40 => Rs 4000
So, the original 50 shares - LTCG is Rs 0 - Then it was at 40, now it is again at 40
the additional 50 shares - Gain is Rs 2000 - Since it was allotted as a bonus - effective cost is zero - the entire value is gain and since it is recently allotted, this gain of Rs 2000 will be treated as short term capital gain (STCG) if sold within one year of allotment and taxed accordingly (@15%)
The way the Indian taxation works with stock split is different. A 2-for-1 stock split will make the investor hold 200 shares of face value Rs 5 if he originally had 100 shares of face value Rs 10. Note that the face value is not changed in the issue of bonus shares, but gets altered in the stock split.
Since these are the same shares whose face value have changed and because of which the number of shares got increased, the additional shares credited is considered to be bought as on the original date of purchase. So, in the case illustrated above, if the company had issued a 2-for-1 split instead of 1:1 bonus, I would still be holding the same number of shares (but of half the face value - which is immaterial), all of my shares would still be qualified for LTCG if I sell it today.
I was wrong.
I remember I bought 50 shares, but now I had 100 shares, when I looked at the corporate actions, I realised that the company has recently issued a 1:1 bonus. So, if you had 1 share, now you will have 2 shares - accordingly the stock price would also have halved. The total value of my position is still at a gain, but because of the bonus shares - not all will be treated as LTCG (Long Term Capital Gain)
Here it goes
2011 - Bought 50 Shares - Price 40 => Rs 2000
2016 - Have 100 Shares - Price 40 => Rs 4000
So, the original 50 shares - LTCG is Rs 0 - Then it was at 40, now it is again at 40
the additional 50 shares - Gain is Rs 2000 - Since it was allotted as a bonus - effective cost is zero - the entire value is gain and since it is recently allotted, this gain of Rs 2000 will be treated as short term capital gain (STCG) if sold within one year of allotment and taxed accordingly (@15%)
The way the Indian taxation works with stock split is different. A 2-for-1 stock split will make the investor hold 200 shares of face value Rs 5 if he originally had 100 shares of face value Rs 10. Note that the face value is not changed in the issue of bonus shares, but gets altered in the stock split.
Since these are the same shares whose face value have changed and because of which the number of shares got increased, the additional shares credited is considered to be bought as on the original date of purchase. So, in the case illustrated above, if the company had issued a 2-for-1 split instead of 1:1 bonus, I would still be holding the same number of shares (but of half the face value - which is immaterial), all of my shares would still be qualified for LTCG if I sell it today.
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