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free shares

ritu gupta (article asistant) (27 Points)

06 February 2011

i would want to know that what would be the accounting entry that i would pass in my books in case i receive 250 shares of a company for free..! and also would like to know what would be the tax treatment for the same when i sell those shares...?

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6 Replies

Devendra (Chartered Accountant) (4775 Points)
Replied 07 February 2011

Dear Ritu,

I think the entry should be:-

Free shares Received A/c (250 x 10) Dr. 2500

To Donor A/c (250 x 10) 2500

(Being shares recd. without any consideration)

(It is assumed that each share costs10)

1) When you sell the Shares within 1 year and you gain profit, then the profit will be charged @ 15% under the Head Capital Gains as Short term Capital Gains.

2) And if you sell the shares at a profit after 1 year, then the profit earned will be charged @ 20% as Long Term Capital Gain.

Regards,

Devendra Kulkarni

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ritu gupta (article asistant) (27 Points)
Replied 07 February 2011

Dear Devendra,

If we pass this entry, we actually meant that we have purchased this entry from the donor, say for example "RCIL" is the donor, therfore in that a case we cannot pass this entry.

And, I doubt that the Shares received Without Consideration has no Value to it and therefore is not chargeable to tax. I am not sure but wanted to know the entire thing.

Regrards,

Ritu

CA Riswa Parekh (Practicing) (1591 Points)
Replied 07 February 2011

YOU HAD TOLD THAT YOU HAD RECEIVED IT FOR FREE SO THE TREATMENT SHOULD BE AS LIKE BONUS SHARE

WHEN YOU RECEIVE ONLY STOCK WILL INCREASE : NO JOURNAL ENTRY

WHEN YOU SELL :1) When you sell the Shares within 1 year and you gain profit, then the profit will be charged @ 15% under the Head Capital Gains as Short term Capital Gains.

2) And if you sell the shares at a profit after 1 year, then the profit earned will be charged @ 20% as Long Term Capital Gain.

BUT REMEMBER YOUR ENTIRE SALE CONSIDERATION WILL BE YOUR CAPITAL GAIN AS IT IS FREE.

HOPE THIS WILL SOLVE YOUR PROBLEM

ritu gupta (article asistant) (27 Points)
Replied 07 February 2011

Hey Riswa,

true that the shares are received without consideration but in Tally in order to show the bonus shares seperately wht shud be entry to be passed...? I hope u understood wht i meant..?