ITR filing: Results season for Q3FY23 is about to end and listed entities are showering interim and final dividends, bonus shares, buyback of shares, etc. to reward its loyal long term investors. As all these rewards announced by the listed companies are income of its shareholders, it becomes important to know how income tax rules applies on dividend paying stocks, issuance of bonus shares and buyback of shares.
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As per tax and investment experts, interim dividend or final dividend is an additional income of a stock market investor and it comes to one’s account without selling of the portfolio stock. So, it is considered an additional income of the investors and hence it gets added to one’s annual income at the time of income tax return (ITR) filing and income tax is levied as per the income tax slab in which the taxpayer falls after adding these dividends with one’s annual income. However, in the case of buyback of shares, the income tax is being paid by the company announcing the buyback while shareholder need not pay any income tax.
Income tax calculator: How bonus shares are taxed
On how income tax rule applies on sale of bonus shares, Sujit Bangar, Founder at Taxbuddy.com said, “Bonus shares are issued by company to the existing shareholders in proportion of their existing shares. There is no tax implication at the time of allotment of bonus shares. It is one of the benefits of issuing bonus shares. Period of holding for bonus share is calculated from date of allotment of bonus shares to sell date. Tax is applicable on bonus shares at time of selling as it is applicable to other shares.”
On income tax calculation while selling bonus shares, Mumbai-based tax and investment expert Balwant Jain said, “If the bonus shares have been issued before 31st January 2018, then in that case, cost of the bonus share would be close price of the stock on 31st January 2018. If the bonus shares have been issued after 31st January 2018, then cost of bonus shares would be zero.”
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Balwant Jain said income tax on bonus share sale is calculated on FIFO (First In First Out) basis citing, “If the bonus shares are sold within one year of issuance, then flat 15 per cent income tax will be levied as income tax on bonus shares. If bonus shares are sold after holding it for more than one year, then in that case, bonus share beneficiary will have to pay 10 per cent tax on income over ₹1 lakh that shareholder has earned from issuance of bonus shares.”
How interim/final dividends are taxed
On income tax rules applicable on interim or final dividend received by a shareholder, SEBI registered tax and investment expert Jitendra Solanki said, “Interim or final dividend is credited to shareholders’ account without selling of the portfolio stock. Hence, at the time of ITR filing, dividend income gets added to one’s annual income and tax is levied as per the income tax slab applicable on the taxpayer.”
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Income tax rule applicable on buyback of shares
“As per Section 115QA of the IT Act, any domestic company which buyback its own shares is liable to pay additional income-tax on distributed income at an effective tax rate of 23.296 (including 12% Surcharge and 4% Health and education cess). Buyback tax shall be paid with in 14 days from the date of payment of consideration. If fail to pay within stipulated time, 1% simple interest will be imposed,” said Sujit Bangar of Taxbuddy.com adding, “As per section 10(34A) of IT act Capital gain arising out of buyback of will be exempted from tax in the hands of shareholder.”
