>Know the right cost for calculating tax on rights shares

There are times when companies issue rights shares for their shareholders and this needs to be considered closely for the purpose of the calculation of the capital gains or loss that is earned from the investment. This is possible only when the right cost is allocated to the different purchases made under different conditions as will give rise to varying situations. Here are some of the variations that will be faced by the individual and how they can tackle the position.

Rights issue:There are rights issue made by companies whereby they offer the investors additional shares usually at a lower price than the prevailing market price. The new shares are offered in a specific ratio based on the existing shares that are held in the company.  In such a situation the investor is eligible to make the additional investment and they will then have an expanded holding in the form of the initial shares as well as the additional rights shares.  When these shares are sold the question that arises is with respect to the cost that will have to be taken into consideration for the purpose of determining the exact amount of capital gains that are earned in the process. This is not very difficult to understand but what is needs is clarity on the exact situation and how different amounts are allocated for this purpose.

Cost of shares:There are three possible conditions that the investor will face when they are offered the rights shares depending on whether they subscribe to the shares or not and if they choose to renounce the shares. If the answer is yes then there are two elements that will determine the cost for the individual. The first part covers the initial shares that were bought and the cost price for these shares constitutes the amount that they will consider in the tax workings. For the purpose of the calculation of the cost for the new shares the amount that is actually paid under the rights issue for this purpose would be considered as the cost for the right shares. This part of the working is simple to understand.

If the investor does not subscribe to the rights shares and they hold only the original shares then the cost for this original purchase will remain the cost for the individual. The differentiation of the rights shares are important in the sense that is most likely that these are offered to the investor at a lower cost and  hence this will have a lower cost element wherein the capital gains could turn out to be higher when the calculation is made. In terms of determining the nature of the capital gains the holding period for the original as well as the rights shares will have to be considered separately when they are sold.

Renouncing the shares:Another option that is also employed by the owner of the shares is to actually renounce the rights shares in favour of some other investor and the collect a fee for this purpose. When this step is actually undertaken then the amount that is received by the existing investor from the other investor would be considered as a short term capital gains and the cost of acquisition for this purpose will be taken as nil. The period of holding will be considered from the date of the offer made by the company to the date of the renouncement.

On the other side for the investor who has actually taken the renouncement offer from some other investor the cost element will work out to be slightly different. Here the amount that is paid for the purpose of the renouncement plus the amount that is actually paid to the company for the purchase of the rights shares would be considered as the total cost for the investor. 

The author can be reached at arnavpandya@hotmail.com