Bonus Shares Taxation Explained: A Complete Guide With Practical Examples

 

Bonus shares often excite investors, but the real challenge begins when it comes time to sell them. Understanding the tax treatment of bonus shares is essential so that you can make the right decisions and avoid paying unnecessary taxes.

This article explains:

• How bonus share taxation works
• The meaning of cost of acquisition for bonus shares
• Short-term vs long-term gains
• A full example with dates and calculations
• What you can and cannot set off
• How to avoid unnecessary tax legally
• A quick reminder of LTCG rules
• What you should remember before selling bonus shares

Let’s break it down step by step.

---

1. Example Setup: Buying Shares and Receiving Bonus

Consider this situation:

Purchase Details

• Purchase date: 1 November 2018
• Shares bought: 1
• Purchase price: ₹1,000

Bonus Declaration

• Bonus announcement: 1 January 2019
• Bonus ratio: 1:1 (one free share for every one held)
• Price on bonus date: ₹1,200

After the bonus:

• Number of shares = 2
• Theoretical ex-bonus price = ₹1,200 ÷ 2 = ₹600

Your investment value remains the same:

• Before bonus: 1 share × ₹1,200 = ₹1,200
• After bonus: 2 shares × ₹600 = ₹1,200

---

2. Price Appreciation After Bonus

Due to increased demand after a price correction, bonus shares often push stock prices higher.

Assume that by 1 December 2019, the stock rises to:

₹800 per share

You now decide to sell both shares.

---

3. Tax Calculation: Purchased Share vs Bonus Share

Each share has a different cost and different holding period.
So, the two shares must be taxed separately.

---

A. Tax on the Original Share

• Purchase date: 1 Nov 2018
• Selling date: 1 Dec 2019
• Holding period: More than 1 year → Long-Term Capital Asset (LTCG/LTCL)
• Cost price: ₹1,000
• Selling price: ₹800
• Result: Long-Term Capital Loss (LTCL) of ₹200

---

B. Tax on the Bonus Share

• Bonus allotment date: 1 Jan 2019
• Selling date: 1 Dec 2019
• Holding period: Less than 1 year → Short-Term Capital Asset (STCG/STCL)
• Cost price: ₹0 (bonus shares always have zero cost)
• Selling price: ₹800
• Result: Short-Term Capital Gain (STCG) of ₹800

Tax on STCG

Short-term capital gains on equity are taxed at:

15% flat

So, tax = ₹800 × 15% = ₹120

---

4. Can You Set Off Long-Term Loss Against Short-Term Gain?

No.

Income tax rules clearly state:

Long-term capital losses cannot be set off against short-term capital gains.

Therefore:

• Your ₹200 LTCL from the original share cannot reduce the taxable STCG of ₹800.
• You must pay tax on the full ₹800 short-term gain.

---

5. How to Avoid the 15% Tax Legally

There is a difference between tax evasion (illegal) and tax avoidance (legal).

The smart way to avoid tax on bonus shares:

✔ Sell bonus shares after 1 year from the date they were allotted

This converts STCG into LTCG.

LTCG Rules:

• Up to ₹1 lakh per year – ZERO tax
• Above ₹1 lakh – taxed at 10% (without indexation)

---

6. Example of Tax-Free Sale of Bonus Shares

Let’s assume:

• Selling date: 1 December 2020
• Price = ₹1,000 per share

For the bonus share:

• Cost price = ₹0
• Sale price = ₹1,000
• Profit = ₹1,000

But the holding period is now more than 1 year.

→ This becomes Long-Term Capital Gain (LTCG)
→ Tax = 0, because LTCG up to ₹1 lakh is exempt.

A simple decision — waiting a few more months — saved you 15% tax.

---

7. The Most Important Rule Investors Forget

For bonus shares, the holding period starts from the DATE OF BONUS ALLOTMENT — not the date of original purchase.

This rule determines whether your gain is long-term or short-term.

Many investors mistakenly apply the original purchase date and end up paying unnecessary tax.

---

8. Additional Concept: Grandfathering (Advanced)

There is also a concept called grandfathering, introduced when LTCG tax was reintroduced in 2018.

Since it requires a detailed numerical explanation, it will be covered separately if readers request it.

---

Conclusion

Bonus shares are tax-efficient when handled correctly, but they require careful attention to:

• The date you receive the bonus shares

• How long you hold them

• Whether your gains are short-term or long-term

• The inability to offset LTCL with STCG

By understanding these rules, you can:

✔ Avoid unnecessary taxes
✔ Plan your selling strategy
✔ Maximize your long-term returns