Bonus Shares — Meaning, Ratio, Tax 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.
Team Sahi
Bonus shares are free additional shares that a company issues to its existing shareholders. No payment is required from shareholders to receive them. Companies issue bonus shares from their retained earnings or free reserves, rewarding shareholders without distributing cash.
How Bonus Shares Work
When a company announces bonus shares, it states a ratio. A 1:1 bonus means one free share for every one share already held. A 2:1 bonus means two free shares for every one share held. A 1:2 bonus means one free share for every two shares held.
The total number of outstanding shares increases after the bonus issue. The company's total market capitalisation stays roughly the same immediately after the announcement. This causes the share price to fall proportionally. A 1:1 bonus on a ₹100 share results in a revised price of approximately ₹50, with the shareholder now holding twice as many shares.
Why Companies Issue Bonus Shares
Companies choose bonus issues for several reasons:
- Rewarding shareholders: Distributing value without paying out cash preserves liquidity for the business
- Improving affordability: A lower share price makes the stock more accessible to retail investors
- Signalling confidence: Bonus issues are typically seen as a sign of a company's financial health and accumulated profits
- Increasing liquidity: More shares in circulation can improve trading volumes
Key Dates in a Bonus Issue
Three dates matter for shareholders tracking a bonus issue:
- Announcement date: The board approves and publicly discloses the bonus issue
- Record date: The date on which shareholders must hold shares to receive the bonus
- Ex-bonus date: One trading day before the record date. Buyers purchasing on or after this date do not receive the bonus shares
Investors who wish to receive bonus shares must buy and hold the stock before the ex-bonus date.
Tax Treatment of Bonus Shares in India
Bonus shares are not taxable when received. The shareholder does not pay income tax or capital gains tax at the time of the bonus issue.
The acquisition cost of bonus shares is considered zero for capital gains purposes. When bonus shares are eventually sold, the entire sale proceeds (after brokerage) become the taxable gain. The holding period for determining short-term or long-term capital gains begins from the date of allotment of the bonus shares, not the original purchase date.
| Holding Period | Gain Type | Tax Rate |
|---|---|---|
| Less than 12 months from allotment | Short-term capital gain (STCG) | 20% |
| 12 months or more from allotment | Long-term capital gain (LTCG) | 12.5% above ₹1.25 lakh |
Bonus Shares vs Stock Split
Both bonus shares and stock splits increase the number of shares and reduce the share price. The mechanisms differ. In a stock split, existing shares are divided into smaller units. In a bonus issue, new shares are created from reserves and issued free of cost. The accounting treatment differs, but the economic impact on share price and total value is similar for the shareholder.
How to Track Bonus Issues in India
NSE and BSE publish corporate action announcements on their websites. SEBI mandates that companies provide advance notice before the record date. Investors holding stocks in a demat account receive bonus shares automatically credited by the company's registrar after the record date, typically within 15 days of the bonus issue date.