How are bonus shares taxed & why aren’t you allowed to offset losses?

Income Tax
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Bonus shares are additional shares that a company issues to its existing shareholders at no extra cost. These shares are typically distributed in a certain ratio, like 1:1 or 2:1, which means you’d get one or two bonus shares for every share you already own.

Companies issue bonus shares for various reasons like rewarding their shareholders, enhancing liquidity, and reducing the share price, making it more accessible to potential investors.

For example, if you own 100 shares of a company, and it announces a 1:1 bonus issue, you’d receive an additional 100 shares for free. The total number of shares you own would double, although the market price per share will be halved to reflect the increase in shares, and hence your investment value remains the same.

How are bonus shares taxed?

See, there will be two transactions, one, when you receive the bonus shares and another when you sell such shares.

When you receive the bonus shares, you are not liable to pay any taxes as there are no capital gains.

When the shares are sold, capital gains tax is levied on the sale of shares. For the bonus shares, the cost of acquisition will be zero, and the date of purchase will be the day on which the bonus shares are issued.

Let’s take an example to understand better.

Say you’re holding 200 shares of ABC Pvt. Ltd., which you purchased in November 2020 at ₹100 per share. In August 2024, the company announced a 1:1 bonus issue, when the share price was ₹300. After the bonus, your total shares double to 400, and the share price adjusts to ₹150 per share.

Now, if you decide to sell 250 shares from your total holdings, as per FIFO (First in first out) settlement, your 200 original shares will be sold first and then the remaining 50 will be the bonus shares. Here’s how the capital gains will be calculated.

Capital gains calculation for bonus shares
Capital gains calculation for bonus shares1036×701 186 KB

What is bonus stripping?

Bonus stripping is a tax-saving strategy that exploits the price adjustment that occurs when a company issues bonus shares.

It typically involves buying shares just before a company issues bonus shares and then selling the original shares at a lower (ex-bonus) price, resulting in a capital loss, which can then be set off against other capital gains, thereby reducing overall tax liability.

Example: Imagine you bought 200 shares of Company X at ₹100 per share. Shortly afterward, the company announces a 1:1 bonus issue, giving you 200 additional shares. The per-share price would then drop to ₹50, reflecting the bonus. If you sell the original 200 shares at this lower price, it creates a capital loss of ₹10,000, which can be used to offset other capital gains.

However, the Income Tax Act was amended in 2023 to curb this practice. Now, if an investor:

  • acquires shares within three months before the record date of a bonus issue, and
  • sells the original shares within nine months from the record date,

any resulting capital loss on the original shares will be disallowed for tax purposes in such a case.

3 Likes
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Do I have to pay tax when I receive bonus shares?

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Hey @Jayni,

No, you do not have to pay taxes on bonus shares when they are allotted to you. However, when you sell them, they will be subject to capital gains tax.

Hope this helps!

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Hi @Surbhi_Pal,

For bonus shares allotted before 31st Jan 2018 and sold after 31st Jan 2018, the FMV as of 31st Jan 2018 is to be taken as the cost of acquisition. I have read this on IT Dept FAQs and other news articles. Is this understanding correct?

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Hey @jayhg00,

Yes, for bonus shares issued before 31st Jan 2018, the FMV as on 31st Jan 2018 would be taken as the COA.

Moreover, for bonus shares issued after this date, the COA would be zero.

Hope this helps!

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@Surbhi_Pal - Thank you very much for the confirmation.

1 Like
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@Surbhi_Pal - And what about the Cost of Acquisition of shares due to demerger of companies before 31st Jan 2018 but sold after 31st Jan 2018? For example, if I have been allotted shares of Reliance Communication, Reliance Capital etc before 31st Jan 2018 by virtue of holding shares in Reliance Industries and I sell the RCOM, RCap shares after 31st Jan 2018, what is the Cost of acquisition of those shares ?

Please enlighten since I have not been able to get a concrete answer to this scenario.

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Hey @jayhg00,

The original cost of acquisition (as on 31st Jan 2018) will be proportionately allocated to the split shares (based on the split percentage) for the calculation of LTCG.

Hope this clarifies.

10

If a person buy 100 stock for 1lakh and he get bonus share of 100 share so total share with bonus is 200shares.
If a person sells 100shares for 50000 which he bought for 1lakh without selling bonus share will it be treated as loss

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Hi @Vikash689,

Whenever bonus shares are issued, the share price is also adjusted depending on the issue ratio.

Now, when you decide to sell the shares, the original shares will be sold first and because the share price is lower now, it’ll result in a capital loss.

However, there’s a provision under the Income Tax Act that disallows bonus stripping. Under this section if,

  • An investor buys shares within a period of 3 months prior to the record date of the bonus issue AND,
  • The investor sells all or any of the original shares within a period of 9 months after the record date of the bonus issue.

If both the above conditions are fulfilled, you’ll not be able to claim the losses.

1 Like
12

Hi @Surbhi_Pal

Let’s say I bought 100 shares of A in 2022 (over a year ago) for ₹100 each and yesterday (10/30/24) company A does a 1:1 split giving one fully paid-up bonus equity share for each existing fully paid-up equity share. So I now have 200 shares of A. I do understand that the share price of A typically drops by 50% (excluding normal daily fluctuations) when the 1:1 bonus shares are issued. And, the average cost of my shares which was previously ₹100 will be recalculated to ₹50.

The model when selling is first-in-first-out. Let’s say I sell 100 shares. The original 100 shares will be sold and incur LTCG or LTCL depending on whether the selling price is above or below ₹50. This is my understanding of your response in post #2. Assuming my understanding is correct, I have an additional question:

What is considered the acquistion date of the remaining 100 bonus shares? Is it the same date as the orginal 2022 date? Or, is it the date of the split (10/30/24)?

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Hi @Russell,

The date of acquisition in case for the bonus shares will be the date on which the bonus shares were issued.

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Thanks for your response, @Surbhi_Pal. Please refer to my example in post #3 to which you replied in post #4.

Let’s say those shares bought in 2022 for ₹100 have a steady share price of ₹150 on the days before the split occurs on 10/30/24. If I sell all the shares on any of those days before the split all the capital gains will be long term.

But I do not sell … the split occurs and lets say the shares have a price of $75 (no appreciation or market movement because of the split) so that the total value of the shares before the split (100x₹150) and after the split (200x₹75) is the same.

Now, if I sell all my shares the gain on the original shares will be long term but the gain on the bonus shares, based on your response, will be treated as short term and I will have a higher tax burden because of the split. This does not appear to be fair to the investor. What are your thoughts on this, @Surbhi_Pal?

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Hi @Russell,

Yes, the gains on the bonus shares will be treated as short-term and taxed at a higher rate. However, whenever bonus shares are issued, the share price is also adjusted and hence your LTCG will also be lower or in most cases there would be long-term loss. In your example as well, if the bonus shares were not issued your gains would be ₹50 per share, however, after the issue you’d actually have a capital loss of ₹25 per share for the original shares, and a gain of ₹75 on the bonus shares.

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Thanks for the very nice explanation @Surbhi_Pal. I am an NRI who lives in the US. In the US, each split share gets the same holding period as the share it was split from and the cost of acquistion is appropriately adjusted - so there is no tax impact on the share holder. Based on your explanation, the Indian model is very different.