Income Tax: How are dividend-paying stocks, bonus shares, and buyback of shares taxed?

Income Tax: Many companies recently have announced dividends on stock, buyback of shares and issuance of bonus shares as a reward to their long-term investors. But one should know that these rewards come under the purview of income tax as they are considered income to the shareholders. Let us understand how dividend-paying stocks, buyback of shares, and bonus shares are taxed. 

Tax on Interim Dividend or dividend-paying stocks 

According to tax and investment experts, an interim dividend or final dividend is an additional income received by a stock market investor that does not require the sale of portfolio stock. As a result, it is considered additional income by the investors, and it is added to one's annual income at the time of income tax return (ITR) filing, and income tax is levied based on the income tax slab in which the taxpayer falls after adding these dividends to one's annual income.

Tax on bonus shares 

According to Chintak Shah, Vice President, Anand Rathi Wealth Limited, bonus shares do not give rise to any tax implications in the hands of the shareholder. However, the market price per share is readjusted depending on the bonus ratio. 

Tax on Buyback of shares

Section 115QA of the IT Act states that any domestic company which buyback its own shares is liable to pay tax at 20 per cent plus surcharge at 12 per cent plus applicable cess.

“Buyback is taxed at the company level at 20 per cent on the difference between the buyback price and issue price of the share. It is an exemption in the hands of the shareholder,” said Chintak Shah. 

How is Tax calculated on dividend-paying stocks, bonus shares and buyback of shares?

Investors have to pay tax according to the income tax slab of investors in case of dividend paying stocks. 

In case of the Buyback of shares as mentioned earlier the income tax is applied at the company level that is 20 per cent plus cess. And there is no tax impact on bonus shares. 

How to file tax for dividend-paying stocks, bonus shares and buyback of shares?

Dividend shares should be shown as Income from Other Sources of vehicle filing ITR. 

In case of bonus shares, nothing to be shown in ITR, and talking about the Buyback of shares, this should be shown as Exempt Income in ITR