Archive / Investment Adviser (Level 2) / Tax Provisions for Special Cases
nism-series-xb-share-split-consolidation-transfer[ INVESTMENT ADVISER (LEVEL 2) ]
XYZ Ltd. splits each existing share of face value Rs. 100 into two shares of face value Rs. 50. As per NISM Series X-B Chapter 13, what is the tax treatment at the time of the split, and how is the period of holding of the resulting shares determined?
[ A ]No tax arises at the time of the split because it falls outside the definition of 'transfer' under Section 2(47), and the period of holding of the split shares is interpreted to run from the date of acquisition of the original shares, though the Act has no specific provision on this point[ CORRECT ]
[ B ]The split is treated as a transfer under Section 2(47), and capital gains tax becomes payable immediately based on the market value of the additional shares received
[ C ]No tax arises at the time of the split because Section 47 specifically exempts stock splits from capital gains tax
[ D ]No tax arises at the time of the split, but the period of holding of the split shares restarts from the date of the split
Takeaway
Option A is correct: a stock split is not a 'transfer' under Section 2(47), so no tax arises at the time of the split, and the period of holding of the resulting shares is interpreted, without a specific statutory provision, to run from the date of acquisition of the original shares.
Derivation
NISM X-B Section 13.2.1 explains that splitting or consolidation of shares is not covered within the inclusive definition of 'transfer' under Section 2(47), and that cost of acquisition under Section 55 is determined with reference to the original shares — so it can be interpreted that no tax is levied at the time of the split, though there is no specific exemption provided under Section 47 for this. Similarly, the period of holding is interpreted to run from the date of acquisition of the original shares, despite the absence of a specific statutory provision. A common error is assuming a specific Section 47 exemption applies, or that the holding period restarts on the date of the split.
Why the others fail
B — The split is treated as a transfer under Section 2(47), and capital gains tax becomes payable immediately based on the market value of the additional shares received
The book explains that splitting of shares is not covered within the inclusive definition of 'transfer' under Section 2(47), so no capital gains tax arises at the time of the split itself.
C — No tax arises at the time of the split because Section 47 specifically exempts stock splits from capital gains tax
The book is explicit that although no tax is levied at the time of a split, this is because a split is not a 'transfer' at all under Section 2(47) — there is no specific exemption for splits provided under Section 47.
D — No tax arises at the time of the split, but the period of holding of the split shares restarts from the date of the split
The book interprets the holding period of split shares as running from the date of acquisition of the original shares, not restarting from the date of the split.