Income tax: Taxation of shares and fractional shares received on the merger


In the merger of HDFC and HDFC Bank, I am entitled to some fractional shares of HDFC Bank Limited. When and how the transaction will get taxed? How do I report fractional entitlement in Schedule 112A of ITR which does not accept fractional quantities of shares?

As per the provisions of Section 47 of the Income Tax Act, allotment of shares on the merger of two companies is not treated as a transfer and therefore there are no tax implications in respect of shares of HDFC Bank Ltd. allotted to you in respect of shares held by you in HDFC Ltd. As and when the shares allotted on the merger are sold, the combined holding period of HDFC Limited and HDFC Bank Ltd. Is to be considered for determining whether the profits are short-term capital gains or long-term capital gains. The cost incurred to acquire HDFC Ltd. shares is to be taken into account for determining the cost of HDFC Bank shares allotted and the cost of the shares of HDFC Bank Limited sold is to be computed accordingly. If the shares were acquired prior to 1st February, 2018 the closing price of the HDFC Ltd. shares on 31st January 2018 will be taken as the cost of the shares of HDFC Limited provided STT is paid both on purchase and sale. The long-term capital gains on listed shares and equity mutual funds are taxed 10% beyond the initial one lakh without indexation. The short-term capital gains are taxed at a flat rate of 15%.

As far as money received in respect of fractional entitlement of shares is concerned, since the fractional shares are not sold by you and as such STT is not paid in respect of such fractional shares, the same cannot be taxed under Section 112A which is applicable if STT has been paid. 

In my opinion, the long-term capital gains on such fractional shares would be taxed at 20% after applying the indexation on the proportionate cost of fractional shares in respect of money received by you. Please note you will have to take the actual cost of purchase and apply indexation to it. The grandfathering benefit of taking the closing price on 31st January 2018 in case the shares were acquired prior to 1st February 2018 in such case is not available in my opinion.

If the shares of HDFC Limited were held for less than 12 months, the sale of profit on fractional shares of HDFC Bank Limited would be treated as short-term capital gains and taxed at the slab rate applicable to you.

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Updated: 09 Aug 2023, 07:37 AM IST

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