The frequently asked questions (FAQs) released by the tax department on taxation of long-term capital gains (LTCG) under Section 112A didn’t cover the issue of split stocks. As per my understanding, the fair market value (FMV) as on 31 January 2018 is available for all shares or units procured prior to that date. By that metric, even split shares are eligible for full FMV as on 31 January 2018.
My query is related to HDFC Bank, which on 22 May 2019, split its outstanding shares from a face value of ₹2 to ₹1, doubling the number of shares. If I sell all my shares, will these shares be eligible for claiming full FMV as on 31 January 2018 or will the FMV be divided by two? The FMV of HDFC Bank shares as on 31 January 2018 on BSE and NSE was ₹2,095.00 and ₹2,013.50, respectively.
As you had held equity shares for more than 12 months from the date of allotment, the gains arising out of the sale would be taxable as LTCG in your hands.
As per Section 55(2)(ac) of the Income-tax Act, the cost for the purpose of computation of LTCG shall be the FMV of the shares as on 31 January 2018 (in place of the actual cost of purchase), provided the FMV as on 31 January 2018 is lesser than the sale value. However, the said Section does not provide any specific clarification with respect to FMV to be considered in case of a subsequent share split.
As rightly mentioned by you, the FAQs issued by the Central Board of Direct Taxation (CBDT) cover the aspects such as bonus shares and rights issue, but clarification in relation to shares split is not provided and, hence, is a subject matter of debate.
Corresponding provisions of Section 55(2)(b)(v) of the Act (in relation to any other capital asset) expressly provide that the cost of acquisition for the shares post consolidation and division shall be the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.
While one may want to drive an inference from these provisions and choose to consider the FMV of the shares for the purpose of computing capital gains, equal to half of the FMV as on 31 January 2018, the position is not free from doubt, as there is no express clarity on the same.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Send in your queries and views at [email protected]