Bonus Shares — Meaning, Ratio, Tax Rules and How They Work in India
Bonus shares are free shares issued to existing shareholders from company reserves. Learn how bonus ratios work, key dates, tax treatment, and how to track bonus issues in India.
Bonus shares are additional shares that a company issues to its existing shareholders at no cost, funded from the company's retained earnings or free reserves rather than through new capital. Companies listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) issue bonus shares to reward shareholders, improve stock liquidity, and signal financial confidence without distributing cash. The Securities and Exchange Board of India (SEBI) mandates that companies announce bonus issues in advance with a record date, and the tax treatment of bonus shares in India follows the Income Tax Act provisions where the acquisition cost is treated as zero for capital gains purposes.
Bonus shares are free additional shares issued by companies to their existing shareholders, funded from retained earnings or free reserves. Shareholders do not pay anything to receive bonus shares. This corporate action increases the total number of outstanding shares while the company's overall market capitalisation remains approximately the same, causing the per-share price to adjust downward proportionally.
What Are Bonus Shares?
Bonus shares represent a distribution of a company's accumulated profits to shareholders in the form of additional equity rather than cash dividends. When a company announces a bonus issue, it specifies a ratio. A 1:1 bonus ratio means shareholders receive one free share for every share they already hold. A 2:1 ratio means two new shares for every one held. A 1:2 ratio means one new share for every two held.
Why Companies Issue Bonus Shares
Companies listed on NSE and BSE issue bonus shares for several reasons. Distributing value through bonus shares rewards shareholders without depleting the company's cash reserves. Lower per-share prices after a bonus issue make the stock more affordable to retail investors, potentially increasing trading volumes. Bonus issues also signal that a company has strong retained earnings and financial health. The Securities and Exchange Board of India (SEBI) requires companies to make advance disclosures before issuing bonus shares.
Key Dates in a Bonus Issue
Three dates determine eligibility and timing for bonus share receipt.
- Announcement date: The company's board of directors approves and publicly discloses the bonus issue.
- Record date: Shareholders holding shares on this date qualify to receive the bonus.
- Ex-bonus date: One trading day before the record date. Investors who purchase shares on or after the ex-bonus date do not receive the bonus shares.
Investors must buy and hold shares before the ex-bonus date to qualify for the bonus issue.
How Bonus Shares Affect Share Price
The share price adjusts downward on the ex-bonus date to reflect the increased number of shares. A company trading at INR 200 per share that announces a 1:1 bonus issue sees its price adjust to approximately INR 100 per share on the ex-date. Each shareholder then holds twice as many shares at the new price, so the total holding value remains approximately the same. The company's total market capitalisation does not change because of the bonus issue itself.
Tax Treatment of Bonus Shares in India
Bonus shares are not taxable when received. The Income Tax Act treats the acquisition cost of bonus shares as zero for capital gains calculation purposes. When bonus shares are eventually sold, the entire sale proceeds (after brokerage and charges) become taxable capital gains. The holding period for determining short-term or long-term capital gains begins from the bonus allotment date, not from the original purchase date of the parent shares.
| Holding Period (from Allotment) | Capital Gain Type | Tax Rate |
|---|---|---|
| Less than 12 months | Short-Term Capital Gain (STCG) | 20% |
| 12 months or more | Long-Term Capital Gain (LTCG) | 12.5% above INR 1.25 lakh |
Tax rates as per the Finance Act 2024 applicable for FY 2025-26 onwards. Refer to the Income Tax Department website for the latest schedules.
Stock Split vs Bonus Shares
Stock splits and bonus issues both increase the total number of shares and reduce the per-share price. The mechanisms differ in important ways. In a stock split, existing shares are divided into smaller units — a 1:2 split converts each share into two shares of half the face value. In a bonus issue, entirely new shares are created from the company's reserves and issued to shareholders. Face value remains unchanged in a bonus issue.
| Parameter | Bonus Shares | Stock Split |
|---|---|---|
| Source | Retained earnings / free reserves | Subdivision of existing shares |
| Face Value | Unchanged | Reduced proportionally |
| Share Capital Impact | Increases (new shares issued) | No change (same capital, more units) |
| Tax Treatment (India) | Zero acquisition cost for gains | Original cost split proportionally |
| Shareholder Action Required | None (automatic credit) | None (automatic credit) |
How to Track Bonus Issues in India
NSE and BSE publish corporate action announcements including bonus issues on their official websites. SEBI mandates that companies provide advance notice before record dates. Investors holding shares in demat accounts receive bonus shares automatically credited by the company's registrar after the record date, typically within 15 business days.
Frequently asked questions
Do I need to pay anything to receive bonus shares?
Bonus shares are issued free of cost to existing shareholders. The company funds the bonus from its retained earnings or free reserves. Shareholders holding shares on the record date receive bonus shares automatically in their demat accounts without any payment.
What is the tax on bonus shares when sold in India?
Bonus shares have an acquisition cost of zero under the Indian Income Tax Act. When sold, the full sale amount becomes the capital gain. Short-term capital gains tax (STCG) of 20% applies if sold within 12 months of allotment. Long-term capital gains (LTCG) above INR 1.25 lakh are taxed at 12.5%.
What is the difference between bonus shares and stock split?
Bonus shares are new shares created from a company's retained earnings and issued free to shareholders, with face value unchanged. A stock split divides existing shares into smaller units, reducing the face value proportionally. Both increase share count and reduce per-share price.
What is the ex-bonus date?
The ex-bonus date is one trading day before the record date set by the company for the bonus issue. Investors who purchase shares on or after the ex-bonus date do not receive the bonus shares. Only those holding shares before the ex-bonus date qualify for the bonus.
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