Listed companies often undertake various corporate actions to ensure their shares remain actively traded on the stock exchange. One such action is a stock split, which is designed to make shares more accessible to investors and improve market liquidity.
In a stock split, the company divides its existing shares into smaller units, reducing the face value per share. This makes the shares more affordable, potentially increasing trading activity and attracting new investors.
What is the difference between the face value of share and the market value of share?
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Face Value: It is the nominal value of shares assigned by the company and shown in the share certificate. This value remains constant unless the company changes it and you can find its mention in the company’s balance sheet (e.g. 10,000 paid-up equity shares of ₹100 each, ₹100 is the face value per equity share)
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Market Value: It is the price at which the stocks are traded currently. It fluctuates based on factors like demand, supply, company performance, and market conditions.
When a company announces a stock split, it specifies a split ratio (e.g., 1:4) and a record date - the date by which you must hold the shares in your demat account to be eligible for the split. Shareholders on the record date receive additional shares based on the split ratio.
For e.g, if a company announces a 1:4 stock split for shares with face value of ₹100 each. It means that if you hold one share, it will get divided into 4 shares of the company. Basically you will receive 3 extra shares for every 1 share you’ve held.
While the number of shares increases, the overall value of your investment remains unchanged, as the price per share will adjust proportionally to the split.
Let us move to its tax implication:
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When you receive the split shares: No tax liability arises when you receive additional shares.
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When you sell the shares after split: The sale will be subject to capital gains tax, and the calculation depends on:
- Holding period: The holding period of the split shares will be the same as that of the original shares.
- Cost of acquisition: The cost per share will be adjusted in proportion to the split ratio.
The applicable tax rates for sale of shares received on split are given below:
To understand the calculation of stock split and its taxation, let us refer to the example below.
You’ve been holding 1,000 shares of ABC Ltd. for 18 months at an average cost of ₹500 per share. The company announces a 1:4 stock split, increasing your holdings to 4,000 shares.
Post-split, the share price of the company will also reduce in the same ratio. Now suppose, you sell all 4,000 shares a week later for ₹180 per share.
Details of the transaction are given below in the table.
Tax calculation:
