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Computation of capital gain in case of Sale of Converted Securities
1. As per section 47(x) conversion of bonds or debentures, or deposit certificate into shares or debentures of that company are not treated as transfer and hence no capital gain.
2. But if such converted shares or debentures are transferred subsequently then there arises capital gain whichis computed by following rules as shown under :
3. As per section 49(2A) Cost of acquisition of converted securities is cost of shares or debentures which has been appropriated towards the converted securities.
| Q.1 | Mr. X purchases 200 FCD for Rs. 70 each. 100% value of FCD is converted into equity shares. Determine the cost of acquisition of equity share. |
| A.1 | It is not given how much FCD is getting converted to equity share. Therefore it is assumed that 1 FCD = 1 equity share. Cost of acquisition = 14,000 ÷ 200 = Rs. 70 per share. Suppose in the same question it is given 100% value of FCD is converted into 500 equity shares, then cost of acquisition = 14,000 ÷ 500 = Rs. 28 per share. |
| Q.2 | Mr. X purchases 200 PCD for Rs. 70 each. 60% value of PCD is converted into equity shares. Determine the cost of acquisition of equity share and cost of debentures. |
| A.2 | It is not given how much PCD is getting converted into equity share. Therefore it is assumed that 1 PCD = 1 equity share. Cost of acquisition of share = 60% of 14,000 ÷ 200 = Rs. 42 per share. Cost of acquisition of debenture = 40% of 14,000 ÷ 200 = Rs. 28 per debenture. Suppose in the same question it is given 60% value of PCD is converted into 500 equity shares and 40% of value of PCD to 150 debentures, then cost of acquisition of share = 60% of 14,000 ÷ 500 = Rs. 16.80 per share. Cost of acquisition of debenture = 40% of 14,000 ÷ 150 = Rs. 37.33 per debenture. Let us check it. 200 × 70 = 14,000 = (500 × 16.80) + (150 × 37.33) = 14,000. |
4. To determine whether the asset is LTCA / STCA period of holding is taken from the date of allotment of original securities. (Rule 8AA w.e.f 17-3-2016)
5. Indexation is done from the year of sale of shares or debentures to year of conversion of shares.
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FAQs on Sale of Converted Securities - Taxation - Income Tax for assessment (Inter Level)
| 1. What are converted securities? |  |
Ans. Converted securities are financial instruments that were initially issued as one type of security, such as bonds or preferred stock, but have been converted into another type of security, usually common stock. This conversion typically occurs based on predetermined terms and conditions.
| 2. How are the sale proceeds from converted securities taxed? | |
Ans. The taxation of sale proceeds from converted securities depends on various factors, including the holding period and the individual's tax bracket. If the converted securities were held for less than one year before the sale, the proceeds are generally taxed as short-term capital gains, which are subject to the individual's ordinary income tax rates. If the converted securities were held for more than one year, the proceeds may qualify for long-term capital gains treatment, which often results in lower tax rates.
| 3. Are there any tax implications when converting securities into another type? | |
Ans. The act of converting securities into another type does not typically trigger a tax liability. The tax implications usually arise when the converted securities are eventually sold. However, it is essential to consult with a tax professional or review the specific tax laws in your jurisdiction to fully understand the consequences of converting securities.
| 4. Can losses from the sale of converted securities be used to offset other gains? | |
Ans. Yes, losses from the sale of converted securities can generally be used to offset other capital gains. If the total losses exceed the gains, the excess losses can be used to offset ordinary income up to a certain limit. This limit is $3,000 for individuals and $1,500 for married individuals filing separately. Any remaining losses can be carried forward to future tax years.
| 5. Are there any special tax considerations for selling converted securities obtained through employee stock options or restricted stock units? | |
Ans. Yes, there are specific tax considerations for selling converted securities obtained through employee stock options or restricted stock units. These transactions may be subject to additional tax rules, such as the requirement to hold the securities for a specific period before qualifying for favorable tax treatment. It is crucial to consult with a tax advisor or review the applicable tax regulations to accurately determine the tax implications of selling such converted securities.
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Dec 20, 2024 Last updated |
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