Taxability of Rights Shares in India: Complete Guide with Capital Gains Treatment:

Taxability of Rights Shares in India: Complete Guide with Capital Gains Treatment Have you received rights shares during the year? & don’t know the tax treatment of the same, then this article is for you What Are Right Shares? When a company issues new shares to its existing shareholders in proportion to their current shareholding, such shares are called Right Shares. The company gives existing shareholders the right (but not obligation) to subscribe to additional shares, usually at a price below the prevailing market price.

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A shareholder has three options

1. Subscribe to the shares,
2. Renounce the rights in favour of another person
3. Simply allow the rights to lapse

Taxable Events There are two separate assets involved in such a transaction

Assets	Nature	When Taxable
Right Entitlement (RE)	Separate capital asset: right to subscribe	On the renunciation/sale of the right
Right Shares (RS)	New shares subscribed by exercising the right	On the eventual sale of the shares acquired

Cost of Acquisition Cost of Right Entitlement (Right to Subscribe) The cost of acquiring a right entitlement is taken as NIL in the hands of the original shareholder since the existing shareholding has not made any separate payment. Cost of Right Shares: When Subscribed by Original Shareholder When the original shareholder exercises the right and subscribes to new shares, the cost of acquisition of those right shares is the subscription price actually paid to the company.

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Cost in Hands of Renouncee (Third Party) When a shareholder renounces the right entitlement to a third party, the third party pays a consideration for acquiring the right. If the Renouncee subsequently subscribes to the shares:

• Cost will be: Amount paid to acquire right + Subscription price paid to company

TAX TREATMENT Scenario 1: Original Shareholder Subscribes and Sells Right Shares When the original shareholder subscribes to right shares and later sells them, capital gains are computed as under:

Particulars	Amount (Rs.)
Sale Price of Right Shares	XXX
Less: Cost of Acquisition (Subscription Price paid)	(XXX)
Capital Gains	XXX

Holding period: The holding period for right shares is counted from the date of allotment of the right shares (not from when the original shares were acquired). LTCG threshold: >12 months for listed shares & >24 months for unlisted shares.

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Scenario 2: Original Shareholder Renounces the Right Entitlement Where the original shareholder renounces the right to a third party in exchange for consideration, the renunciation is treated as a transfer of a capital asset and attracts capital gains.

Particulars	Position
Asset transferred	Right Entitlement (separate capital asset)
Cost of acquisition	NIL
Sale consideration	Amount received from renouncee
Capital Gain	Full amount received (since CoA = Nil)

Period of Holding: From the offer date to the renunciation date Note: In such a case, gain will mostly be STCG & taxable at normal rates

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Scenario 3: Rights Allowed to Lapse No Tax Consequence Scenario 4: Renouncee Subscribes and Later Sells Right Shares When a renouncer (third party who purchased the right entitlement) later sells the right shares:

Particulars	Amount (Rs.)
Sale Price	XXX
Less: CoA = (Amount paid for right + Subscription Price)	(XXX)
Capital Gains	XXX