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.
A shareholder has three options
- Subscribe to the shares,
- Renounce the rights in favour of another person
- 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.
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.
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
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 |