right issue s
This query is : Resolved
04 October 2016
I am understanding the treatment of transfer of right issues(I.e it is treated as income or reduced from cost of invt.)
plz explain...
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04 October 2016
I am not understanding the treatment of transfer of right issues(I.e it is treated as income or reduced from cost of invt.)
plz explain...
22 July 2025
Here’s a clear explanation of the treatment of transfer of right shares (right entitlements) in income tax:
Query (Dated 04 October 2016):
"I am not understanding the treatment of transfer of right issues (i.e., whether it is treated as income or reduced from the cost of investment). Please explain."
✅ Answer: Tax Treatment of Transfer of Right Entitlements
When a shareholder does not exercise the right to subscribe to shares under a rights issue, but instead sells or renounces the rights to someone else (for a consideration), the tax treatment is as follows:
1. What Are Right Entitlements?
When a company issues rights shares, existing shareholders are given an option (not obligation) to buy additional shares at a specified price.
Shareholders can:
Subscribe to the rights shares, or
Renounce/transfer the right to someone else for consideration.
2. If You Transfer the Right Entitlement (Don't Subscribe):
🔹 Tax Treatment of Amount Received on Sale of Right Entitlement:
The amount received from transferring the rights is treated as a capital gain.
According to Section 55(2)(aa)(iii) of the Income Tax Act:
Cost of acquisition of right entitlement = Nil.
Therefore, entire amount received from transfer = Capital Gain.
It will be considered a short-term capital gain, as rights are usually of a short duration.
📌 Example:
You are allotted the right to buy 100 shares.
You choose not to subscribe, and instead sell this right to another person for ₹5,000.
Since cost of right entitlement is nil, your short-term capital gain is ₹5,000.
3. If You Subscribe to the Right Shares:
The amount paid to acquire the right shares becomes the cost of acquisition of those shares.
There is no immediate tax impact.
Capital gain will arise when those shares are eventually sold, and the cost for capital gain purposes will be:
Cost of acquisition = Price paid to subscribe + any premium paid
Query (Dated 04 October 2016):
"I am not understanding the treatment of transfer of right issues (i.e., whether it is treated as income or reduced from the cost of investment). Please explain."
✅ Answer: Tax Treatment of Transfer of Right Entitlements
When a shareholder does not exercise the right to subscribe to shares under a rights issue, but instead sells or renounces the rights to someone else (for a consideration), the tax treatment is as follows:
1. What Are Right Entitlements?
When a company issues rights shares, existing shareholders are given an option (not obligation) to buy additional shares at a specified price.
Shareholders can:
Subscribe to the rights shares, or
Renounce/transfer the right to someone else for consideration.
2. If You Transfer the Right Entitlement (Don't Subscribe):
🔹 Tax Treatment of Amount Received on Sale of Right Entitlement:
The amount received from transferring the rights is treated as a capital gain.
According to Section 55(2)(aa)(iii) of the Income Tax Act:
Cost of acquisition of right entitlement = Nil.
Therefore, entire amount received from transfer = Capital Gain.
It will be considered a short-term capital gain, as rights are usually of a short duration.
📌 Example:
You are allotted the right to buy 100 shares.
You choose not to subscribe, and instead sell this right to another person for ₹5,000.
Since cost of right entitlement is nil, your short-term capital gain is ₹5,000.
3. If You Subscribe to the Right Shares:
The amount paid to acquire the right shares becomes the cost of acquisition of those shares.
There is no immediate tax impact.
Capital gain will arise when those shares are eventually sold, and the cost for capital gain purposes will be:
Cost of acquisition = Price paid to subscribe + any premium paid
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