BEAWARE & THINK Before You Accept An OPEN OFFER Put Forth By The Company...!

Situation:

 

Imaging a situation that you are holding a 1000 shares of a company at a prices of INR 500 per share. This makes your holdings in that stock of INR 5,00,000/-. Also, Sensex is Trading at around 20,000 levels.

 

All the things seem in you favour and you get a good news that the same company in which you have invested your INR 5,00,000/-, has declared an open offer of a buy back. Your happiness knows no bound, since buy back price is always higher than the trading price. 

 

Now, you intend to have the best of both the world's by tendering to that offer; intended to reap in better returns and realising the profit in the deal.

 

At this juncture you are unaware about the TAX BLOW that is waiting to happen if you execute the deal.

 

Real Life Example:

 

The above situation is best explained with the case of HUL (Hindustan Lever Limited), when the stock reacted the same way when open offer announcement for buyback was made by the firm. The stock price rocketed up by 17% to INR 583.60/-, when HUL announced its intention to buy 22.52% stake.

 

Share Selling Options Available & Tax Implications:

 

Sale In Open Offer: Whenever you make a sale in open offer, you have to pay tax; even if the shares were held in your portfolio for more than a year. You can not escape the tax net in this case.

 

Sale in open offer is just like any equity transaction; but is considered as a debt transaction, since there is no STT (Securities Transaction Tax) on it. 

 

Now, a long term investor who had held shares for more than 1 year and sold under open offer, may take Indexation benefit on it. That means, lower of 10% with indexation, 20 % without indexation.

 

If however, the share sale has been done in less than the year, then the share holder is taxed as per his tax slab. There will be the additional tax of surcharge tax, if the income exceeds INR 1 Crore.

 

Sale In Secondary Market: Sale in the secondary market does not attract tax on the long term capital gains, if shares have been held for more than a year. Only STT of 0.1% will have to be paid in this case.

 

For the sale made in less than a year, the gains are taxed at 15% as short term capital tax gains. This could be beneficial for those who are taxed at the higher tax bracket of 20% and 30%.

 

For Whom it is Beneficial To Go For Open Offer...?

 

Tendering to the open offer made by companies, shareholders who are in 10% income bracket or retirees who have higher taxation exemption limit will have such offers advantageous. For those falling in 30% tax bracket, secondary market sale offer is the only best available alternative available.

 

 

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(Important) I-T Returns Might Ask You To Disclose All Assets

Finance Ministry's consistent efforts to counter tax evasion practises in India might lead you to disclose all your assets and liabilities in I-T returns disclosures. This might be made mandatory for individuals and HUF's (Hindu Undivided Families).

 

So, you might have to fill up a new I-T return form that would ask you to disclose all your assets and liabilities. The year that went by saw disclosure of assets and liabilities being made by those individuals who owned foreign assets.

 

This initiative by the Ministry of Finance is to bring into net those HNIs who earlier were evading from paying wealth tax.

 

Wealth Tax is currently charged at 1% of the assets exceeding 30 lacs. This does not exceed one residential property and financial assets.

 

Caution:

 

Kindly confirm with your Chartered Accountant about the implementation of the same and the date of effect, before taking any decision.

 

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BeAware of [1st June 2013] : Dividend Distribution Tax on Debt Mutual Funds hiked to 25%, will become Applicable.

DDT on debt fund investments for retail investors has been increased to 25% from 12.5%

The dividend distribution tax (DDT) on debt fund investments for retail investors has been hiked to 25% from 12.5% (plus surcharge and cess). 

DDT is the tax that debt mutual funds (MFs) pay on the dividend income distributed to retail investors. Although dividends from mutual funds are tax-free in the hands of the investor, your debt fund deducts DDT from the income earmarked for distribution, and gives the rest to investors. 

Currently, liquid funds pay a DDT of 25% (plus surcharge and cess). All other types of debt funds pay 12.5% (plus surcharge and cess) on income distributed to retail investors; and even this is now increased to 25%. 

Retirement Planning Strategy Takes A Hit:

This will be a big hit to those you use their mutual fund debt portfolio as a retirement portfolio, receiving income as dividend distributed to them on regular basis.

Hence, financial planers have a key role to take conscience of the matter and restructure retirement plans of their clients in accordance to the change that has come up.

Clients should ideally invest in growth option with more than a year of horizon in mind. This way they will be able to have the indexation benefits. hose who need regular incomes to be withdrawn from the portfolio, may opt for SWP (Systematic Withdrawal Plan).

However, in case of corporates, DDT paid by all types of debt funds continue to be at 30%. 

A Word Of Caution:

Has your advisor / advisory changed debt funds from DIVIDEND to GROWTH Option. It Not, DO IT BEFORE 1st June ' 2013.

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