Nil cost rule

Capital gains tax normally works on a simple subtraction: what you sold it for, minus what you paid for it. The nil cost rule is what happens when the 'what you paid' side is genuinely zero.

The workbook applies this rule most directly to renounced rights entitlements. When a shareholder is offered the right to subscribe to new shares and instead renounces that right in favour of someone else for a fee, the right itself is treated as a capital asset, and its cost of acquisition is nil. The whole fee collected for renouncing it is therefore taxable gain, not merely the margin over some cost.

Renounced rights (Chapter 13, section 13.4.1). A rights issue lets existing shareholders subscribe to new shares, usually below market price. A shareholder can instead renounce the right in favour of another investor, in exchange for a fee. That right is a capital asset, and the workbook states plainly: the cost of acquisition of the rights so renounced shall be nil.

Period of holding for the renounced right. Reckoned from the date of the company's offer to the date of renunciation, in practice usually a short window, so the gain is typically short-term, 12 months for listed rights, 24 for unlisted, though rights are almost never held that long.

The other place the workbook applies a nil cost. Bonus shares allotted without payment also get a nil cost of acquisition, from the date of allotment, covered in full, with its own worked example and the section 112A grandfathering exception, fair market value as on 31 January 2018, under the separate Bonus shares entry. The underlying logic is identical in both cases: where nothing was paid for what is now being sold, nothing is subtracted at the time of sale.

Mr Trivedi holds shares in a company that announces a rights issue. He is offered the right to subscribe to new shares at a discount, but decides instead to renounce his rights entitlement in favour of another investor for a fee of Rs 45,000.

Sale consideration (renunciation fee)     Rs 45,000
Less: cost of acquisition of the right    Rs      0    (nil, per the rule)
Capital gain                              Rs 45,000

Because the right was offered by the company only 6 weeks before he renounced it, the holding period runs from the offer date to the renunciation date, well under 12 months, so the entire Rs 45,000 is a short-term capital gain, taxed at Mr Trivedi's slab rate.

Contrast an outright sale of shares he had bought years earlier for Rs 45,000: there, the Rs 45,000 cost would be subtracted before computing any gain. The nil cost rule is what makes the renunciation fee fully taxable, with no offsetting cost at all.

Chapter 13 (Tax Provisions for Special Cases), section 13.4.1 (Taxability at the time of renunciation of right), states the nil-cost rule for renounced rights directly, immediately after the parallel bonus-shares rule earlier in the same chapter. Expect a computation question on a renounced rights entitlement, and a conceptual question distinguishing nil cost from no tax, the two are opposites.

• Nil cost does not mean nil tax. It means the entire sale proceeds are gain, with nothing to subtract. This is the most common misreading of the rule.
• The holding period for a renounced right runs from the company's offer date, not from when the original shares were bought.
• The rule applies to the right itself when renounced, not to shares actually subscribed for under the rights issue. A shareholder who exercises the right and buys the new shares has a real cost of acquisition, the subscription price paid.
• Bonus shares follow the same nil-cost logic, but with different holding-period and grandfathering rules of their own. See the Bonus shares entry for that computation in full.