Infosys investors selling shares may have to shell out 4-5 times higher tax

After the IT giant declared a bonus, investors selling shares may have to shell out 4-5 times more

Investors offloading shares of Infosys following allotment of bonus shares will have to pay four to five times higher tax than what they would have if they had sold the shares before the record date.

At its meeting held on July 13, Infosys’ board had recommended a bonus issue of one equity share for every equity share held (1:1) on the record date of September 5. The issue of bonus shares was to celebrate the 25th year of the company’s public listing in India and to improve liquidity. The record date is the cut-off date to determine which shareholders are eligible for the allotment of bonus shares.

Experts say institutional investors looking to sell Infosys shares in the foreseeable future will have to consider the tax impact before taking any hold or sell decision, subject to commercial considerations such as price movement and redemption requests. 

Similarly, individuals wanting to book profits or offload shares of the company after the record date to meet high-ticket purchases, such as buying a house or for unforeseen exigencies, will need to pay a higher tax. Ex-date for the bonus issue was Tuesday. The ex-date is the date in which the seller of a stock will be entitled to a recently announced dividend or bonus, and is usually a business day prior to the record date.

“In case the tax payer has bought shares of Infosys prior to January 31 and is seeking to claim grandfathering benefits, there may be an adverse tax treatment if the original shares are sought to be sold at a price lower than the fair market value (FMV) on January 31,” said Bhavin Shah, financial services tax leader, PwC India.

This is how investors will get impacted. From April 1, long-term capital gains on sale of listed equity shares are taxable at 10 per cent. However, the gains earned till January 31 will be grandfathered with the FMV of the same day taken as the cost of acquisition (cost reset).

If the ex-bonus price at the time of sale of such original shares is less than the FMV on January 31, the corresponding grandfathering gains will be restricted to the lower value.

Notably, the cost of acquisition of bonus shares for tax purposes will be considered as nil as per current tax laws. What’s more, bonus shares issued after January 31 will not be entitled to cost reset (see table). 

Apart from Infosys, investors will have to be mindful of a higher tax outgo on other stocks that declare a bonus as well.

According to Amit Maheshwari, partner at Ashok Maheshwary & Associates, in the ex-bonus scenario, the sale of original and bonus combined will attract more tax than the pre-bonus scenario due to the cap placed on FMV as on January 31 up to the actual sale price.

“Generally FMV on January 31 will be higher than the sales consideration in the post-bonus scenario. Hence, this capping will drastically reduce the cost and consequently the resultant loss which could have been set off against gains made on bonus shares,” he said. For computing capital gains, however, the cost of acquisition and period of holding of any security will be determined on the basis of the first in, first out method.

Let’s say the investor owns 100 Infosys shares which has become 200 post allocation of bonus shares. If the investor chooses to sell only 100 shares, the original 100 will be considered for tax computation, and the cost of acquisition will be as on January 31. However, if more than 100 shares are offloaded, the computation of tax for bonus shares will come into play, resulting in higher tax.