- Date : 11/09/2023
- Read: 3 mins
Shares that pay a dividend, bonus issue of shares and share buybacks are considered an asset in your portfolio. They attract income tax subject to specified terms and conditions. Let’s understand the underlying tax aspects of such investments.
Share investments and the profits that you generate from them fall under the purview of income tax. Shares are considered an asset and the income earned from them a taxable income in your hands. That is why if you own shares that declare dividends, have received bonus shares or money from share buybacks, you have to report the same in your income tax returns. Failure to do so would result in incorrect tax filing which would make you liable to tax penalties. Do you know the taxation of these share transactions? Let’s understand in detail.
- Dividend-yielding shares, buybacks and bonus issues have a specific tax implication
- Dividend income earned is clubbed under ‘Income from other sources’ and taxed at your slab rate
- Bonus shares have no tax implication for shareholders. Only the market price per share is adjusted
- Share buybacks are taxed in the company’s hands at 20% of the difference between the issue and buyback prices.
Taxation of Dividend-Paying Stocks
Stocks that pay dividends to investors are called dividend-paying stocks. Such stocks might pay an interim dividend during the financial year and a final dividend after the financial year ends. Both these dividends are considered taxable income in your hands. The dividend is mentioned under ‘Income from other sources’ and taxed at your income tax slab rates.
Taxation of Bonus Issue of Shares
Bonus shares are additional shares that you might receive from a company into which you have invested. These shares do not give you any income but add to the number of shares owned. As such, there’s no tax implication. However, each share’s market price is changed based on the bonus ratio.
Taxation of Share Buybacks
Share buyback is when the company buys back its outstanding shares from shareholders. The company will pay the relevant amount to you to buyback its shares. Since buyback is not your decision, it is taxed in the hands of the company. The company pays a tax of 20% on the difference between the buyback and issue price plus an additional 12% surcharge and the relevant cess.
For instance, say the share was issued at ₹100 and bought back at ₹120, the company would pay a tax of 20% on ₹20. An additional 12% surcharge and cess would be levied on the tax liability.
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The Bottom Line
While buybacks and bonus shares do not affect your tax liability, dividend income does. So, understand how dividend is treated in your return and calculate your tax liability on the same.