Income tax rule on dividend stocks, bonus shares, buyback

Income tax rule on dividend

Everyone love dividend, bonuses and profit from buyback of shares. But there are many questions which come in their mind such as what are the Income tax rule on dividend paying stocks? What is the tax on dividend income? Exemption limit on dividend income? What is the tax on bonus shares? How to calculate LTCG on bonus shares if a shareholder sell the bonus share then who will pay tax to the govt? What is the tax on buyback of shares? How to calculate tax on buyback of shares ? Let’s answer all your questions

Dividend paying stocks, bonus shares, and buyback of shares are all subject to income tax. As all these rewards announced 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.

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.

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How bonus shares are taxed

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.

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. However, if the bonus shares have been issued after 31st January 2018, then cost of bonus shares would be zero.

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.

Read Also: Income Tax on Cashbacks, Rewards, e-wallet and Online payment

How interim/ final dividends are taxed

An interim dividend is taxed on a receipt basis. In simple words, it is taxable in the previous year in which you receive it. Final dividend including deemed dividend is taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier. 

Interim or final dividend is credited to shareholders’ account without selling of the portfolio stock. Hence, at the time of ITR filing, income tax rule on dividend income is that it gets added to one’s annual income and tax is levied as per the income tax slab applicable on the taxpayer.

Read Also: Income Tax, TDS and Advance Tax on Dividend Income

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 @20% 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. As per section 10(34A), Capital gain arising out of buyback of will be exempted from tax in the hands of shareholder.

Read also: Income Tax: Which Salary Components are Taxable?

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