Archive / Investment Adviser (Level 2) / Tax Provisions for Special Cases
nism-series-xb-rights-issue-renunciation-taxation[ INVESTMENT ADVISER (LEVEL 2) ]
Mr. Paul holds listed shares of ABC Ltd. The company announces a rights issue, and instead of subscribing, Mr. Paul renounces his right in favour of Mr. X for a fee within a few months of the offer. As per NISM Series X-B Chapter 13 (Section 13.4.1), how is Mr. Paul's gain from this renunciation taxed?
[ A ]As a short-term capital gain taxed at normal slab rates, since the cost of acquisition of the renounced right is nil and the right itself is not a listed equity share even though ABC Ltd.'s shares are listed[ CORRECT ]
[ B ]As a short-term capital gain taxed at 20% under Section 111A, since ABC Ltd.'s shares are listed and STT is paid
[ C ]As a capital gain computed using the market price of the right as its cost of acquisition
[ D ]As exempt income, since the right was held for a very short period before renouncement
Takeaway
Option A is correct: the cost of acquisition of a renounced right is nil, the gain is almost always short-term since rights are typically held only briefly, and it is taxed at normal slab rates because the right is not itself a listed equity share, so Section 111A's concessional rate does not apply.
Derivation
NISM X-B Section 13.4.1 states that the cost of acquisition of rights renounced is nil, the holding period runs from the date of the company's offer to the date of renouncement (making it almost always short-term), and that even if the rights are listed, the right is not a listed equity share and hence not covered by Section 111A — so the short-term gain is taxed at normal slab rates. A common error is applying the 20% Section 111A rate simply because the underlying company's shares are listed and STT-paid.
Why the others fail
B — As a short-term capital gain taxed at 20% under Section 111A, since ABC Ltd.'s shares are listed and STT is paid
The book specifically clarifies that even where the rights are listed, the right to subscribe is not itself a listed equity share, so Section 111A does not apply; the gain is taxed at normal slab rates instead.
C — As a capital gain computed using the market price of the right as its cost of acquisition
The cost of acquisition of a right that is renounced is nil, not its market price; the entire renunciation proceeds therefore become the capital gain.
D — As exempt income, since the right was held for a very short period before renouncement
A short holding period makes the gain short-term in nature, not exempt; short-term capital gains on renunciation of rights are taxable at the normal slab rates applicable to the assessee.