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Got a comment from our reader  “I have some share of Satyam Computer which i bought sometime between 2009-2011 on avg price of 85 Rs, now after merger with Tech MahindraI  have got share of Tech Mahindra (on swap ratio of 17:2) (current price around 2200) now if i sell my share, then what will be the tax liability on me on account of long term capital gain (more then 3 year)“. This article explains what is swap ratio, gives an overview of Capital gain, Long term capital gain and Short Term Capital gain, holding period for swap shares.

What is swap ratio?

Swap ratio is an exchange ratio used in mergers and acquisitions of companies. It is the ratio in which the acquiring company offers its own shares in exchange for the target company’s shares. For example, if company A is acquiring company B and offers a swap ratio of 1:5, it will issue one share of its own company (company A) for every 5 shares of the company B being acquired. In other words, if company B has 10 crore outstanding equity shares and 100% of it is being acquired by company A, then company A will issue 2 crore new equity shares of company A to the shareholders of company B, proportionately.

Examples of swap ratio

  • In Jul 2013 Shareholders of Mahindra Satyam received one share of Tech Mahindra (Rs 10 each) for every 8.5 shares of Rs. 2 each they had in the erstwhile Satyam that was absorbed in Tech Mahindra.
  • In Apr 2014 for Ranbaxy Sun Pharma deal  it was announced that Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy

To calculate the swap ratio, companies analyse financial ratios such as book value, earnings per share, profits after tax as well as other factors, such as size of company, long-term debts, strategic reasons for the merger or acquisition etc.

Shares, Capital Gain and Tax

Period of Holding for Shares : Long Term Capital Gain/Short Term Capital Gain

Generally profits arising on sale of any capital assets are treated as long-term if the same have been held for 36 months or more on the date of sale. However, in case of shares or stocks in any company,

  • The holding period requirement is only 12 months or more in order to make such profits as long-term.
  •  In case the shares are sold within 12 months, the short-term capital gains arising on such transaction shall be included in your regular income and shall be taxed at the slab rate applicable to you.

Tax on LTCG or STCG for stocks

The taxability of long-term capital gain (LTCG) would depend on whether at the time of sale of shares, the securities transaction tax (STT) has been paid or not. STT is a tax paid for transactions made on a recognized stock exchange. Securities Transaction Tax (STT) has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks.As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which STT has been deducted and paid, no tax is payable.

If you are liable to pay STT at the time of sale of shares on a recognized stock exchange, then the LTCG can be claimed tax-exempt. This amount of exemption, however, should be disclosed in your personal income tax return to be compliant with reporting requirements.

If you are not liable to pay STT, then the LTCG should be taxed at 20%.  The LTCG could be claimed as exempt from tax by investing in prescribed investment avenues—residential apartment or specified bonds— subject to the fulfilment of conditions specified under the domestic tax law.

Short Term Capital Gain(STCG) : While selling the shares, if you are liable to pay the security transaction tax (STT), the STCG will be taxed at a flat 15%.

ITR and Long Term Capital Gain 

If an individual has made capital gains during the year, he needs to fill ITR Form 2, as Form 1 is only for income from salary/pension, one house property and other incomes (excluding from lottery).ITR Form 2, on the other hand, is for declaring income from (sources other than the one declared in Form 1) capital gains, all house properties and other sources (including lottery).

If one has Long Term capital Gain on Shares and that is tax free then one needs to show it in Schedule EI or Exempt Income point 3 in image shown below. The amount entered has to be difference in Sale Price and Cost Price of shares without any indexation. Our article Exempt Income and Income Tax Return explains it in detail.

Showing LTCG on shares for which STT has been paid in ITR

Showing LTCG on shares for which STT has been paid in ITR

Shares on Swap Ratio and Capital Gain

Tax laws, while defining long-term capital assets, also provide for beneficial treatment to shareholders covered under merger agreements in respect of their new shares, by including the period of shareholding of the original shares.  The period of holding of the original Satyam shares would be considered. Thus, assuming that

Mr. A had purchased 100 Satyam shares in January 2012, he got 850 shares of  Tech Mahindra in Jul 2013. If he sells the Tech Mahindra  shares soon after they are allotted to him, the sale will still be of a long-term capital asset (as the date for computing the period of holding will be from January 2012). If he sells in Aug 2014 that still is Long Term Capital Gain

So holding period of original shares is considered for swapped shares. The process of calculation of Long Term Capital Gain/Short Term Capital Gain remains the same as described above.

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Hope this helped you in understanding Swap Shares, Capital Gains on Stocks, difference between Long Term Capital Gains and Short Term Capital Gains, their Taxability and how to show Long term capital gains in ITR2. Please share your comments and feedback.

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