Bonus Shares in Indian Markets: How They Work, Key Dates and Tax

What Bonus Shares Actually Are

A bonus share is an extra share a company gives to existing shareholders at no cost, in a fixed ratio such as 1:1, 2:1 or 1:2. The company does not raise any money and shareholders do not pay anything. Instead, the company moves a sum from its free reserves, such as the general reserve or the securities premium account, into its paid up share capital. In accounting terms this is a capitalisation of reserves. The total equity on the balance sheet does not change. Only its internal split between reserves and paid up capital changes.

Because new shares are created without new money coming in, the price per share must fall so that the company is worth the same as before. If a company is worth Rs 5,000 crore the morning before a 1:1 bonus, it is still worth roughly Rs 5,000 crore the morning after, just spread across twice as many shares. This is why a bonus issue, on its own, does not make you richer. It is a reorganisation of how your existing ownership is counted, not a transfer of new value to you.

In India, bonus issues are governed by the Companies Act 2013 and SEBI regulations. A company can only issue bonus shares out of free reserves, the securities premium account or the capital redemption reserve. It cannot issue a bonus out of revaluation reserves, and it cannot issue a bonus if it has defaulted on debt or on statutory dues to employees. The bonus, once announced by the board, cannot be withdrawn.

Worked Example: The Infosys 1:1 Bonus of 2018

Infosys, one of the largest stocks on the NSE, announced a 1:1 bonus issue in 2018, meaning one new share for every one held. Suppose you held 100 Infosys shares trading at roughly Rs 1,400 each just before the ex-bonus date. Your holding was worth about Rs 1,40,000. After the 1:1 bonus, you held 200 shares, and the reference price was adjusted to roughly Rs 700. Your holding was still worth about 200 multiplied by Rs 700, which is Rs 1,40,000. Nothing was created out of thin air. The price levels here are illustrative and rounded for teaching.

The real value to a long term holder shows up later. After the bonus, the stock traded at a lower nominal price, which made it easier for small investors to buy a round lot and improved day to day liquidity. Over the following years, as Infosys grew earnings, the 200 shares appreciated together. The point is that the bonus did not deliver an instant gain. It reset the share count and price, and any future gain came from business performance, not from the bonus itself.

The Key Dates: Announcement, Record Date and Ex-Bonus Date

Three dates matter. The announcement date is when the board approves the bonus and tells the exchanges. The record date is the cut off the company uses to look at its register and decide who owns shares, and therefore who is eligible for the bonus. The ex-bonus date is the first day the stock trades without the right to the bonus attached, and the adjusted price kicks in on this day.

Because the NSE and BSE settle equity trades on a T+1 basis, the ex-bonus date is normally the same as the record date under the current shortened cycle. To be eligible you must own the shares at the end of the record date, which means you must have bought on or before the ex-bonus date. If you buy on the ex-bonus date itself, you generally do not get the bonus for that purchase, because your trade settles after the record cut off. Selling on or after the ex-bonus date does not cost you the bonus, since your eligibility was already locked on the record date.

Bonus Shares Versus Stock Splits Versus Dividends

These three corporate actions are often confused. A bonus issue capitalises reserves into share capital, so reserves fall and paid up capital rises, but total equity is unchanged. A stock split simply slices each existing share into smaller units, reducing the face value per share, for example splitting one Rs 10 face value share into five Rs 2 face value shares. No reserves are touched in a split. A dividend is an actual cash payment out of profits, which reduces the company's cash and reserves and puts money in your bank account.

The price effect of a bonus and a split looks identical on the screen, since both increase the share count and lower the price proportionally. The difference is on the balance sheet and in the face value. After a bonus, face value stays the same and reserves shrink. After a split, face value shrinks and reserves are untouched. For your tax and record keeping, this distinction matters because the cost of acquisition is calculated differently for a split versus a bonus.

How Bonus Shares Are Taxed in India

Receiving a bonus share is not a taxable event. You owe nothing on the day the bonus hits your demat. Tax arises only when you sell. The important rule is the cost of acquisition. For bonus shares issued on or after 1 April 2018, the cost of the bonus shares is treated as zero. The original shares keep their original purchase cost. This means that when you sell the bonus shares, almost the entire sale value becomes a capital gain, because there is no cost to subtract.

The holding period for a bonus share is counted from the date the bonus was allotted, not from when you bought the original shares. So your original shares and your bonus shares can have different holding periods and can fall into different tax buckets. For listed equity that you sell on an exchange, the current rates are: long term capital gains (holding over 12 months) at 12.5% on the total gains above Rs 1.25 lakh in a financial year, and short term capital gains (holding 12 months or less) at 20%. These rates apply to transfers made on or after 23 July 2024. The earlier rates, namely 10% LTCG above Rs 1 lakh and 15% STCG, are no longer in force.

A Numeric Tax Walkthrough

Suppose you bought 100 shares of a liquid NSE stock at Rs 800 each, a total cost of Rs 80,000. A year later the company declares a 1:1 bonus and you receive 100 bonus shares at zero cost. Your demat now shows 200 shares. Assume that 14 months after the bonus allotment, the stock trades at Rs 900 and you sell all 200 shares for Rs 1,80,000. These figures are illustrative.

• Original 100 shares: sale value Rs 90,000 minus cost Rs 80,000 equals a gain of Rs 10,000.
• Bonus 100 shares: sale value Rs 90,000 minus cost of zero equals a gain of Rs 90,000.
• Both lots were held over 12 months at the time of sale, so both are long term. Total LTCG equals Rs 1,00,000.
• The first Rs 1.25 lakh of LTCG in the year is exempt, so if this is your only LTCG, the entire Rs 1,00,000 is below the threshold and no LTCG tax is due this year.
• Now suppose you had other equity LTCG of Rs 1,00,000 elsewhere in the same year. Combined LTCG is Rs 2,00,000. Tax applies on Rs 2,00,000 minus Rs 1,25,000, which is Rs 75,000, taxed at 12.5%, giving Rs 9,375 plus 4% cess.

When you sell on the exchange, Securities Transaction Tax (STT) of 0.1% applies on the sell value for delivery based equity, here about Rs 180 on the Rs 1,80,000 sale, and your broker also charges brokerage, exchange fees and GST. STT paid is not added to your cost for capital gains purposes. The lesson from this walkthrough is that the zero cost rule makes bonus shares heavy on capital gains, so the holding period and the timing of your sale, spread across financial years to use the Rs 1.25 lakh exemption each year, can meaningfully change your tax bill.

Why Companies Issue Bonus Shares

Companies issue bonus shares for a mix of practical and signalling reasons. A high nominal price can put off small retail investors, so halving the price through a 1:1 bonus widens the investor base and improves liquidity. A bonus also lets a profitable company reward shareholders without parting with cash, which is useful when management wants to conserve money for expansion while still keeping shareholders engaged.

There is a signalling element too. A bonus capitalises reserves permanently into share capital, which the market often reads as management confidence that future profits can support a larger capital base. That said, a bonus is not proof of health. A weak company can still declare a bonus to generate positive headlines. The sensible response is to treat a bonus as a prompt to study the actual numbers, not as a buy signal in itself.

What Changes for the Shareholder and What Does Not

After a bonus, your percentage ownership of the company is unchanged. Every shareholder receives the bonus in the same ratio, so the slices of the pie all grow together and your slice stays the same proportion. Your voting rights move up in absolute number but stay the same in percentage terms. The intrinsic value per share falls in line with the bonus ratio, because the same business value is now divided across more shares.

• What does not change on bonus day: total holding value, percentage ownership, total market capitalisation, and the underlying business.
• What changes: number of shares you hold goes up, price per share goes down proportionally, and the per share earnings figure (EPS) is restated lower across more shares.
• Future dividends: companies usually keep the same dividend per share, so a 1:1 bonus can effectively double your future rupee dividend income if the per share payout is maintained.
• Charts and indicators: most data providers adjust historical prices for the bonus, so your long run chart stays continuous rather than showing a fake crash.

Common Mistakes Investors Make

The most frequent error is treating a bonus as found money. Because the price adjusts down, your wealth on bonus day is identical to the day before. A second mistake is selling immediately after the credit without thinking about tax. Since the bonus shares carry a zero cost, an early sale can convert almost the whole sale value into a taxable gain, and within 12 months it is taxed at the higher 20% short term rate.

A third mistake is confusing a bonus with a split when tracking cost basis, which leads to wrong capital gains in the tax return. A fourth is buying a stock purely because a bonus was announced, ignoring valuation and fundamentals. The bonus does not improve the business. It only changes the share count.

• Believing a bonus increases your wealth on the spot.
• Selling bonus shares within 12 months and getting hit with 20% short term capital gains tax.
• Mixing up the zero cost rule for bonus shares with the proportional cost rule for splits.
• Buying a fundamentally weak stock just because it announced a bonus.
• Forgetting that the holding period for bonus shares starts from the allotment date, not from your original purchase.

How to Track and Verify a Bonus Issue

Always verify a bonus from the primary source. The company files the announcement, the ratio and the record date with the NSE and BSE under their corporate announcements and corporate actions sections. Do not rely on social media tips. Check the official exchange page, confirm the record date, and make sure your shares are in your demat account before that cut off. After the record date, watch your demat for the credit, which usually arrives within a few working days.

Keep clean records of your original purchase cost and the bonus allotment date. When you eventually sell, your broker's profit and loss statement and your annual information statement from the income tax portal should reflect the zero cost for the bonus lot. Reconcile these against your own notes so your capital gains in the tax return are accurate. If you trade derivatives on the same underlying, remember that the exchange also adjusts strike prices and lot related parameters for corporate actions, so check the revised contract specifications after a bonus.

Sources and Further Reading

For authoritative data and current rules, refer to NSE India, BSE India, SEBI Investor Education and the Income Tax Department. Capital gains rates and STT change with each Union Budget, so always confirm the current rate, the exemption threshold and the contract specifications on the official source before you act. The numbers in the examples above are illustrative and are not a promise of any return.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to NSE India, SEBI Investor Education, Income Tax Department and BSE India. Always confirm current rules, rates and contract specifications on the official source before you trade.