Understanding the tax implication of bonus shares in India

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Understanding the tax implication of bonus shares in India
Company's in India tend to issue bonus shares from the reserves and surplus of the company. These shares are issued on the basis of already existing shares an individual holds. For example, if you hold 100 shares and the company allots bonus shares in the ratio of 1:1, means you would get one additional shares for every share held. So, if you were having 100 shares, you would get an additional 100 shares as bonus. On the other hand if a bonus is issued in the ratio of 1:3, you would get one share for every 3 shares held.

How are bonus shares taxed?

Now, bonus shares are shares to which there is no cost attached and are shares that are issued free. Therefore, the cost is zero. So, if you receive 100 bonus shares and have sold the same at Rs 10,000, than the entire amount would be taxable.

However, the holding period is the most important in case of taxing bonus shares. In fact, shares in general attract a capital gains tax depending on their holding period and so it is for bonus shares. For example, if you hold a bonus share for more than one year from the date of allotment, there would be no capital gains tax that is payable. On the other hand if you hold it for less than one year from the date of allotment, a short term capital gains tax would have to be paid.

Because there is a tax liability on shares if sold before one year, it's always advisable to sell the shares after a period of one year, whether they are bonus shares or not.

To read more on bonus shares click here

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Story first published: Wednesday, June 25, 2014, 10:57 [IST]
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