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Tax queries: How will LTCG tax be calculated while switching from dividend to growth plan of an MF?

Dilip Lakhani, Senior Chartered Accountant, answers queries from our readers on income tax and other levies.

What will be the price of bonus shares allotted after January 31, 2018, under the new law on capital gains? Will it be zero or share price on the date of allotment of bonus shares? What will it be in case of mutual funds, if I switch now over from dividend plan to growth, keeping other things unchanged? —HARI OM MITTAL

The Central Board of Direct Taxes (CBDT) has issued Frequently Asked Questions (FAQs) dated 4 February 2018 regarding long-term capital gains tax regime under section 112A of the Income-tax Act, 1961. However, these FAQs have covered scenario where bonus shares were issued prior to January 31, 2018. Based on these FAQs, it appears that bonus shares allotted after January 31, 2018, ought not to have any specific different treatment under the new tax regime. Accordingly, cost of acquisition for such bonus shares will continue to be determined under existing mechanism. In other words, since bonus shares are allotted without making any payment, the cost of acquisition of bonus shares allotted after January 31, 2018, should be considered as Zero. Further, CBDT has released a draft notification seeking comments on applicability of tax regime under section 112A to cases where securities transaction tax could not have been paid. In these proposed rules, benefit of reduced tax rate of 10% on long-term capital gains has also been extended to bonus shares. As regards the investments in mutual fund is concerned, when you will switch from dividend plan to growth plan, you will be liable to pay tax depending upon the facts of the case as the redemption from dividend plan will be treated as transfer. Depending upon the holding period and the nature of the scheme of mutual fund the tax liability will be determined.

I am about to retire from LIC and I want to purchase a commercial space in my locality for my daughter who would be the sole owner. It would cost Rs 27 lakh. How should I go about to avoid any problem in respect of Income Tax on my part as well as for my daughter who is 23, a student, and has no income. —TARUNENDU GOSAWMI

You can give gift of Rs 27 lakh to your daughter. Neither you nor your daughter will have any liability for payment of any tax under the provisions of IT Act, 1961. Your daughter can invest the said funds for acquiring the commercial space. She will have to obtain PAN Number. She must open her own separate bank account for accepting the gift and making investments. If you wish you can be the joint owner of the said commercial space. As the investment will be made by her utilising own her funds she will be treated as the sole owner.

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