How are bonus shares taxed?

Published: Wednesday, July 3, 2013, 8:49 [IST]

Bonus shares are new shares issued to existing shareholders of a company. These are issued to shareholders in proportion to their current holdings. For example, the company may announce one bonus share for every share held by an investor. As the investor now holds two shares, 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.

Tax Calculation

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's take an example to understand the calculation of short term capital gain tax in case of bonus shares (Long term capital gain tax is zero).

No of shares held - 100
Bonus announcement 1:1
Total Number of shares after 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 in this case will be 100*(60-50) = 1000. If the existing short term capital gain tax rate is 15%, tax liability will be 0.15*1000 = 150.

Now, investor sells the rest 100 shares after some time (in same year) @ 70. Taxable short term capital gain in this case will be 100*(70-0) = 7000. Note that the cost of acquisition of bonus share is taken as 0. Hence the tax liability for this case will be 0.15*7000 = 1050.

Recommendation

Because of higher tax implication in case of short term capital gains on bonus shares, it's advisable to sell them post one year holding period. Tax liability becomes zero on long term capital gains in that case.

About the Author:
The author Bimlesh Singh is a financial advisor. He holds a Bachelor's degree from IIT and is a CFA Level 2 candidate. He can be reached at [email protected].

Courtesy:www.investmentyogi.com

Story first published: Wednesday, July 3, 2013, 8:49 [IST]