2.7. TAX PLANNING THROUGH ISSUE OF BONUS SHARES
When Bonus Shares are issued to the equity shareholders, the value of the shares is not taxed as dividend distributed. However, where redeemable preference shares are issued as Bonus shares, on their redemption, the amount shall be taxed as dividend distributed.
Where Bonus Shares are issued to the Preference Shareholders, on their issue it is deemed to be dividend and liable to tax.
Expenses on issue of Bonus Shares is not allowed as deduction since capital expenditure.
2.8. TAX PLANNING THROUGH PURCHASE OF OWN SHARES OR DISTRIBUTION OF DIVIDEND
Purchase of Own Shares :
Where the company purchase its own shares, the payment refund by shareholders is not treated as dividend.
However as per Sec. 64A, when a company purchases its own shares from a Shareholders, the capital gain arising to shareholders is chargeable to Tax.
The Capital Gain shall be computed u/s 48. Indexation of cost of acquisition
Value of the year of purchase shares
. . X Cost of acquisition
Index value of the year of acquisition of share
- The Shareholders shall pay Tax on LTCG.
Thus if a company purchases its own shares instead of distributing dividend, it can reduce its tax liability.