How are bonus shares taxed in India, and what should investors know about their implications on capital gains?
In India, bonus shares are not taxed at the time of their issuance. They are considered as a gift from the company to its shareholders. However, the tax implications arise when you sell these shares. The cost of acquisition for bonus shares is considered as zero for the purpose of calculating capital gains. Therefore, when you sell bonus shares, the entire sale amount is treated as capital gains.
For example, if you receive 100 bonus shares and later sell them for ₹200 each, your total sale proceeds will be ₹20,000. Since the cost of acquisition is zero, your capital gains will be ₹20,000. Depending on the holding period, these gains can be classified as short-term or long-term. If held for more than a year, long-term capital gains tax (up to ₹1 lakh is exempt) applies, while short-term gains are taxed at 15%. It is advisable to maintain records of your original investment to determine accurate capital gains when you eventually sell the shares.
I recently received some bonus shares from a company I had already invested in, and I’m a bit confused about the tax rules. Could you please guide me on how bonus shares are taxed in India, both at the time of allotment and when I decide to sell them?
I can understand your confusion because bonus shares often look like “free” shares, but taxation in India works a bit differently. When you receive bonus shares, there is no tax at the time of allotment, since they are issued without any payment from your side.
The taxation comes into play only when you sell these bonus shares. Here’s how it works:
• Cost of Acquisition: For bonus shares, the cost is considered as zero.
• Holding Period: The period of holding is counted from the date of allotment of the bonus shares, not from your original purchase.
Capital Gains Tax:
• If you sell them within 12 months, the gain is treated as Short-Term Capital Gain (STCG) and taxed at 15% (plus applicable cess and surcharge).
• If you sell them after 12 months, the gain is treated as Long-Term Capital Gain (LTCG). Here, gains up to ₹1 lakh in a financial year are exempt, and gains above that are taxed at 10% (without indexation benefit).
So, in short, no tax when you get the shares, but tax applies on capital gains when you sell them.
For official details, you can also check the Income Tax Department of India’s portal here:
https://incometaxindia.gov.in/Pages/tax-information-services/capital-gains.aspx