Taxation on Bonus Shares: A Guide

Taxation on Bonus Shares

Original Shares (Long-Term) vs. Bonus Shares (Short-Term)

Bonus shares are additional shares given to current shareholders without any extra cost. While they feel like a free corporate gift, selling them triggers specific Capital Gains Tax rules. Here is the exact framework for how the Indian Income Tax Department treats the sale of your original shares versus your newly acquired bonus shares.

1. Determine the Cost of Acquisition

The most critical factor in calculating tax is knowing your purchase price (Cost of Acquisition).

  • Original Shares: The actual price you paid to buy the initial shares.
  • Bonus Shares: The cost is always treated as ₹0 (zero), as per Section 55 of the Income Tax Act.

2. Calculate the Holding Period

The holding period determines whether your profit is taxed as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG). For listed equity shares, the threshold is 12 months.

Original Shares Purchase ───► Bonus Shares Allotted ───► Sale Date
└─────────── Period A ──────────┘
└─────────────────────── Period B ──────────────────────┘
  • For Original Shares: The holding period begins from the original purchase date.
  • For Bonus Shares: The holding period begins strictly from the allotment date of the bonus shares, not when you bought the original shares.

3. Apply the Tax Rates

When you mix Long-Term Original Shares and Short-Term Bonus Shares, your gains are split and taxed at different rates.

Long-Term (LTCG)

Applies to: Original shares held for > 12 months.

Tax Rate: 12.5% on gains exceeding ₹1.5 lakh in a financial year (without indexation).

Short-Term (STCG)

Applies to: Bonus shares sold within 12 months of allotment.

Tax Rate: Flat 20% on the entire profit amount.

4. Understand the FIFO Rule

First-In, First-Out (FIFO): When selling a portion of your holdings, you cannot choose which specific shares to sell. The Income Tax Department enforces the FIFO method for dematerialized (demat) shares.

Since original shares are bought before bonus shares are allotted, any sale will exhaust your original shares first before touching the bonus shares.

5. Practical Calculation Scenario

The Scenario:

  • Jan 2024: Buy 100 shares at ₹500 (Total: ₹50,000).
  • Jan 2025: Receive 100 bonus shares (Ratio 1:1). Cost is ₹0.
  • May 2026: Sell all 200 shares at ₹800 each (Total: ₹1,60,000).
Share Category Qty Cost Basis Holding Period Tax Rate Profit
Original Shares 100 ₹500 Long-Term 12.5%* ₹30,000
Bonus Shares 100 ₹0 Long-Term** 12.5%* ₹80,000

*Note: The 12.5% rate applies to aggregate gains exceeding ₹1.5 lakh. **In this specific May 2026 scenario, bonus shares held since Jan 2025 also become long-term.

6. Avoid the "Bonus Stripping" Trap

Investors sometimes try to buy shares just before a bonus issue to intentionally book a short-term loss on the original shares (as the stock price drops after a bonus issue) while keeping the bonus shares.

Under Section 94(8) of the Income Tax Act: If you buy shares within 3 months before a record date and sell original shares within 9 months after:

  • The resulting short-term loss is disallowed.
  • That loss amount is instead added to the cost basis of your bonus shares.
This rule prevents artificial tax evasion through created losses.