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Tax after redemption of pref. shares

08 August 2016

Cairn India co is going to issue me preference shares of face value rs.10 as mentioned in offer. This co is going to merge with Vedanta ltd.As a merging prossess cairn india shareholders are getting 1share of vedanta and 4 preference shares of each face value rs. 10 for one share of cairn india.I am going to get 1000 pref shares. Redemption period is 18 months and dividend on pref share is 7.5 % so my question is what will be the tax treatment on amount received by me after redemption of these pref shares.Here what is the cost of purchase of pref.shares. I think redemption means no STT to be paid. Co may directly purchase from shareholders Read more at: /forum/tax-after-redemption-of-pref-shares-366828.asp

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3 Replies

CA. Rahul Bansal (CA Practice ) (22 Points)
Replied 12 September 2016

Redemption of preference shares will be a capital gain event.

Cost of shares would be calculated on proportionate basis for all the shares received.

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Naveen (student) (49 Points)
Replied 13 September 2016

Cost of preference shares or any shares will be the actual cost incurred. For example Mr. A purchased Shares from B Ltd. at 1000shares*10=10000/-. Then A Ltd. acquired B Ltd. and share holders of B Ltd were alloted 10 shares in exchange of 1 share of Rs10(1000shares*10(exchange)*10). So the value has become 100000. In this example the cost is 10000/- and profit if sold is 90000/-(100000-10000)

bobby (Others) (55 Points)
Replied 01 July 2018

As per section 47 of the ITA, amalgamations or mergers qualifying under section 2(1B) are tax neutral. As such, any gain in the hands of Cairn or its shareholders resulting from the transfer of shares pursuant to the Transaction will be exempt from capital gains tax.

I am not a CA but you can verify this from your CA before filing ITR.