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Taxability of Bonus Shares Under Income Tax Act, 1961 - Taxguru - in

Bonus shares are new shares issued by a company to existing shareholders in proportion to their current shareholding. While bonus shares do not affect the total earnings per share of an investor, they serve two key purposes: 1) improving the liquidity of the company's shares by increasing supply, and 2) providing a tax benefit since no dividend distribution tax is levied on bonus shares unlike cash dividends. The cost basis of bonus shares is considered zero for capital gains tax purposes, so the full sale price is taxable as a capital gain. The article provides an example calculating short-term capital gains tax on the sale of original shares and bonus shares.

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73 views3 pages

Taxability of Bonus Shares Under Income Tax Act, 1961 - Taxguru - in

Bonus shares are new shares issued by a company to existing shareholders in proportion to their current shareholding. While bonus shares do not affect the total earnings per share of an investor, they serve two key purposes: 1) improving the liquidity of the company's shares by increasing supply, and 2) providing a tax benefit since no dividend distribution tax is levied on bonus shares unlike cash dividends. The cost basis of bonus shares is considered zero for capital gains tax purposes, so the full sale price is taxable as a capital gain. The article provides an example calculating short-term capital gains tax on the sale of original shares and bonus shares.

Uploaded by

singh.rohitprabhu
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TAXABILITY OF BONUS SHARES UNDER INCOME TAX ACT,

1961
AUTHOR :TG TEAM

https://taxguru.in/income-tax/taxability-bonus-shares-income-tax-act-1961.html

Dividends are one of the most important sources of earning for long term investors who invest in stocks.
Companies declare dividends in two forms i.e. cash dividend and stock dividend (Bonus shares). Cash dividends
are tax free in the hands of investors as company declaring the dividend pays dividend distribution tax on it.
There is less clarity regarding tax implication of bonus shares / stock dividends. In this article, we will discuss
the tax treatment of bonus shares.

Page Contents

What are Bonus shares?


Purpose of bonus shares
1. Improving the liquidity of a share
2. Tax saving through Bonus Share
Tax Calculation in case of Bonus Shares

What are Bonus shares?


Bonus shares are new shares issued to existing shareholders of a company. These shares are issued to the
shareholders in proportion of their current holdings. For example, the company may announce one bonus share
for every share held by an investor. As the investor after bonus issue holds two shares (1 original share and 1
bonus share), EPS gets halved. Hence bonus share do not affect total EPS of investor.

Bonus shares are considered free shares as their cost of acquisition is taken as zero, although they are not free in
true sense.

Purpose of bonus shares


As mentioned above, bonus shares do not have any impact on total EPS. If total EPS doesn’t change, then the
question arises – what’s the need of bonus shares? Bonus shares basically help in solving two purposes:

1. Improving the liquidity of a share

Suppose company’s shares are quite illiquid. Reason for illiquidity can be many but we are not bothered about
that right now. At this point of time, company announces 1:1 bonus share. Since number of shares gets doubled
in the market, supply of shares increase, resulting in a downward pressure on the stock price. Now, as the stock
is available at cheaper valuation, more buyers get interested in it and hence liquidity improves.

2. Tax saving through Bonus Share

In case of cash dividends, companies have to pay dividend distribution tax resulting in diminished return for
investors. In case of bonus shares, no dividend distribution tax is levied.

Tax Calculation in case of Bonus Shares


Cost of acquisition of bonus shares is taken as zero hence the capital gain on selling a bonus share is equal to its
selling price.

Let us take an example to understand the calculation of capital gain tax in case of transfer of bonus shares.

No. of Shares held originally 100


Bonus Announcement 1:1
Total Number of Shares post bonus 200
Purchase Price 50

Total number of shares held post bonus is 200 and let’s say investor sells 100 shares @ 60 before one year.
Taxable short term capital gain would be as under –

Selling price (100*60) 6000


Cost of acquisition (100*50) (5000)
Capital gain on sale of original shares 1000

Short term capital gain tax of INR 150 (i.e. 15% of INR 1000) is payable.

Now, investor sells the rest 100 shares after some time (in same year) @ 70. Taxable short term capital gain on
transfer of bonus share would be as under –
Selling price (100*70) 7000
Cost of acquisition (100*0) 0
Capital gain on sale of bonus shares 7000

Short term capital gain tax of INR 1050 (i.e. 15% of INR 7000) is payable.

It must be noted here that long term capital gain tax on transfer of shares would be payable @10% from
Financial Year 2018-2019.

Source: InvestmentYogi is one of the leading personal finance websites in India

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