Bonus shares are additional shares issued by a company to its existing shareholders without collecting a separate purchase price. A company may announce a bonus issue in a ratio such as 1:1, 2:1 or 1:2.

In a 1:1 bonus issue, an investor receives one additional share for every share already owned. An investor holding 100 shares would therefore receive another 100 shares and hold 200 shares after the allotment.

A bonus issue increases the number of shares in circulation, but it does not automatically create additional wealth for shareholders. The market price normally adjusts to reflect the larger number of shares. Tax generally becomes relevant when the shares are sold rather than when they are allotted.

Is receiving bonus shares taxable?

The allotment of bonus shares to an existing shareholder ordinarily does not result in an immediate income-tax liability. The shareholder has not received cash, and the economic value of the original holding is usually adjusted across a larger number of shares.

However, tax consequences arise when the investor transfers the bonus shares. The resulting gain or loss is generally reported under the head “Capital Gains,” assuming the investor holds the shares as an investment rather than as trading  stock.

People who frequently trade shares as a business may receive different tax treatment. Classification depends on factors including intention, accounting treatment, frequency of transactions and individual circumstances.

Cost of acquisition of bonus shares

For bonus shares covered by the applicable rules and allotted after 1 April 2001, the cost of acquisition is generally treated as nil.

This does not mean that the original purchase cost should be divided equally between the old and bonus shares. The original shares retain their actual acquisition cost, while the qualifying bonus shares receive a separate nil cost.

Suppose an investor purchases 100 shares at ₹500 each. The total acquisition cost of the original holding is ₹50,000. If the company later declares a 1:1 bonus issue, the investor receives another 100 shares.

Holding period of bonus shares

The holding period of bonus shares begins from their date of allotment, not from the date on which the original shares were purchased.

This distinction is important because the original and bonus shares may have different holding periods even though they belong to the same company.

For equity shares listed on a recognised stock exchange in India, a holding period exceeding 12 months generally results in long-term classification. Shares held for 12 months or less are generally classified as short-term.

The holding period of the original shares continues from their original purchase date. Receiving bonus shares does not restart that period.

Applicable capital-gains tax rates

For transfers during FY2025–26, gains from eligible listed equity shares sold through a recognised stock exchange and satisfying the applicable Securities Transaction Tax conditions are generally treated as follows:

• Eligible short-term capital gains under Section 111A are taxed at 20%.
• Eligible long-term capital gains under Section 112A are taxed at 12.5% to the extent aggregate qualifying gains exceed ₹1.25 lakh during the financial year.

Applicable surcharge and the 4% Health and Education Cess may be added to the calculated tax.

The ₹1.25 lakh threshold is an aggregate annual threshold for qualifying long-term capital gains. It is not separately available for every company, demat account or transaction.

If the applicable STT or other statutory conditions are not met, a different tax provision or rate may apply.

Practical bonus-share example

Assume Meera purchases 100 listed shares at ₹500 each for ₹50,000. The company later announces a 1:1 bonus issue, giving her 100 additional shares at no separate payment.

After the price adjusts, Meera eventually sells all 200 shares at ₹300 each. Her total sale proceeds are:

200 shares × ₹300 = ₹60,000

Her combined acquisition cost is:

• Original shares: ₹50,000
• Bonus shares: Nil
• Total cost: ₹50,000

Ignoring brokerage and other transfer expenses, the combined capital gain is:

₹60,000 − ₹50,000 = ₹10,000

For understanding the two lots separately:

• The original shares produce a loss of ₹20,000 because their sale value is ₹30,000 against a cost of ₹50,000.
• The bonus shares produce a gain of ₹30,000 because their sale value is ₹30,000 against a nil cost.
• The net result is a gain of ₹10,000.

The tax classification of each component depends on its respective holding period. If both lots qualify as long-term and the investor’s aggregate eligible Section 112A gains for the year remain within ₹1.25 lakh, no tax may be payable on this gain. It may still need to be disclosed in the income-tax return.

FIFO treatment in a demat account

Investors cannot always choose which specific shares are considered sold. For dematerialised securities, the First-In-First-Out method is generally used. The earliest shares credited to the relevant demat account are treated as sold first.

Therefore, if Meera sells only 100 shares after receiving the bonus issue, the transaction may first be matched with her older original shares rather than the bonus shares. Investors should review their demat statements, allotment dates and transaction history before calculating gains.

Can a loss on shares be adjusted?

A short-term capital loss may generally be adjusted against eligible short-term or long-term capital gains. A long-term capital loss can generally be adjusted only against eligible long-term capital gains.

Unused capital losses may ordinarily be carried forward for up to eight assessment years when the return is filed within the prescribed time and other conditions are satisfied.

Records investors should retain

Investors should preserve:

• The original contract note and purchase statement.
• The company’s bonus-issue announcement.
• The bonus allotment or demat-credit date.
• Sale contract notes and STT details.
• Demat statements needed for FIFO calculation.
• Brokerage and eligible transfer-expense records.
• Previous tax returns containing carried-forward losses.

Final takeaway

Bonus shares are normally not taxed when allotted, but their sale can create taxable capital gains. Their acquisition cost is generally nil, and their holding period starts from the allotment date. Original shares retain their own cost and holding period.

Investors should calculate each lot carefully and should not rely only on the adjusted average price displayed by a broker.

Disclaimer: This article is provided solely for general educational purposes. It does not constitute tax, legal or investment advice. Tax treatment depends on transaction dates, taxpayer status and individual circumstances. Readers should verify current rules with the Income Tax Department and consult a qualified tax professional.