Bonus shares
Also written Bonus issue · Bonus share
Additional shares issued free to existing shareholders in proportion to their holding — no tax at allotment, a nil cost of acquisition, and a fresh holding period from the allotment date.
In plain language
A bonus issue gives you more shares and no more company. The workbook's framing is that bonus shares are additional shares issued to existing shareholders on the basis of shares already owned by them, without any additional cost, to give shareholders an incentive and to increase the equity base of the company.
For tax, three consequences follow, and they are the whole of the examinable content:
- Nothing is taxed when the bonus shares are allotted — not in the company's hands, not in the shareholder's.
- Their cost of acquisition is nil.
- Their holding period starts on the date of allotment, not on the date the original shares were bought.
How it works
Period of holding. Reckoned from the date of allotment of the bonus shares. A listed bonus share is short-term if held for not more than 12 months; unlisted, that becomes 24 months.
Cost of acquisition. Nil, where the bonus shares were allotted without payment. Two overrides:
- Bonus shares issued before 01-04-2001: the fair market value as on 01-04-2001 may be taken, at the assessee's option.
- Where the bonus shares are long-term and satisfy section 112A, the grandfathering rule applies — cost is the higher of (a) actual cost, which is nil, and (b) the lower of FMV on 31-01-2018 and the full value of consideration. Since the actual cost is nil, the deemed cost is simply the lower of the 31-01-2018 FMV and the sale consideration.
Sale consideration. The amount received or receivable. For unquoted bonus shares sold below fair market value, the FMV is substituted as the sale consideration.
Rates. Short-term gains on STT-paid equity shares: 20% under section 111A. Long-term: 12.5% under section 112A on the excess over Rs 1,25,000.
If held as stock-in-trade, the gain is business income. Under ICDS-VIII stock-in-trade is recorded at cost of acquisition, and since that is nil for bonus shares, the value of the stock is not enhanced.
A worked example
The workbook's own case. Mr A buys 10,000 shares of a listed company at Rs 105 on 01-04-2020. The company issues bonus 1:2 on 01-09-2023 — 5,000 bonus shares. He sells all 15,000 at Rs 120 on 01-08-2024.
Original 10,000 shares
Sale consideration 10,000 x 120 = Rs 12,00,000
Cost 10,000 x 105 = Rs 10,50,000
Holding period 52 months = long-term
Long-term capital gain = Rs 1,50,000
Tax: 12.5% on the excess over Rs 1,25,000 under section 112A
5,000 bonus shares
Sale consideration 5,000 x 120 = Rs 6,00,000
Cost of acquisition = Nil
Holding period 11 months (01-09-2023 to 01-08-2024) = short-term
Short-term capital gain = Rs 6,00,000
Tax: 20% under section 111A = Rs 1,20,000
The entire sale proceeds of the bonus shares are gain, and because the clock ran from allotment, they missed long-term treatment by a single month. Holding them one month longer would have moved Rs 6,00,000 from 20% to 12.5% — roughly Rs 45,000 of tax.
Why NISM asks about it
Chapter 13 (Tax provisions for Special Cases), section 13.1, opens the chapter with bonus shares and works the example above in full. The recurring questions are: is anything taxable at allotment (no), what is the cost of acquisition (nil), and from when does the holding period run (allotment). Chapter 8 repeats the period-of-holding rule in its summary table.
Common exam traps
- The holding period runs from allotment of the bonus shares, not from the purchase of the original shares. This is the single most examined point on the topic.
- Nil cost means the whole sale value is gain — not "no tax". The tax arrives on sale, in full.
- Nothing is taxable at the time of the bonus issue itself, in either the company's or the shareholder's hands.
- Original and bonus shares are computed separately. Do not average the cost across 15,000 shares.
- Grandfathering still applies to long-term bonus shares under 112A — the deemed cost is the lower of the 31-01-2018 FMV and the sale price, not nil.
- Stock-in-trade changes the head, not the cost. Under ICDS-VIII the nil cost carries through and the gain is business income.
Check yourself
1.From which date is the period of holding of bonus shares reckoned?
- a)From the date of purchase of the original shares on which the bonus was declared
- b)From the date of allotment of the bonus shares
- c)From the record date of the bonus issue
- d)From the first day of the financial year in which they were allotted
Show the answer
Answer: (b) From the date of allotment of the bonus shares
Table 8.2 provides that for bonus shares the period of holding is reckoned from the DATE OF ALLOTMENT of bonus shares. The same fresh-start rule applies to right shares and to sweat equity or ESOP shares. It contrasts with situations where the clock carries forward, such as conversion of preference shares into equity or shares of an amalgamated company.
2.What is the cost of acquisition of bonus shares issued on or after 1 April 2001?
- a)The market price on the date of allotment
- b)A proportionate part of the cost of the original shares
- c)NIL
- d)The face value of the shares
Show the answer
Answer: (c) NIL
Table 8.4 provides that where bonus shares are issued on or after 01-04-2001, the cost of acquisition is NIL. If they were issued on or before 31-03-2001 the cost is the fair market value of the share as on 01-04-2001. With a nil cost, the entire sale consideration of a bonus share is capital gain — which is why investors who treat bonus shares as costless windfalls are often surprised by the tax.
3.What is the tax consequence at the time bonus shares are allotted?
- a)The market value of the bonus shares is taxed as a perquisite
- b)No tax implication arises in the hands of either the company or the shareholder
- c)The company pays tax at 20 per cent on the value distributed
- d)A short-term capital gain arises equal to the market value
Show the answer
Answer: (b) No tax implication arises in the hands of either the company or the shareholder
The workbook states that no tax implication arises either in the hands of the company or in the hands of the shareholders at the time of allotment of bonus shares. GAINS WILL BE CALCULATED ONLY AT THE TIME OF TRANSFER of shares by the shareholder. The economic reason is that a bonus issue gives the shareholder nothing he did not already own — his proportionate stake is unchanged and the market price adjusts to the larger share count.