Bonus shares, a popular way for companies to reward their shareholders, are additional shares given without any extra cost, based on the number of shares a shareholder already owns. While receiving these shares is exciting, understanding the tax implications is crucial for shareholders. In India, the income tax treatment of bonus shares involves several aspects, particularly at the time of receipt and upon acquiring them.
Receipt of Bonus Shares
When bonus shares are issued, there is no immediate tax liability for the shareholder. This means that if a company decides to reward its shareholders by issuing bonus shares, the shareholders do not have to pay any income tax on these shares at the time they receive them. This is because the issue of bonus shares is considered a capital restructuring exercise and not an income distribution.
Cost of acquisition of Bonus Shares
In the current scenario, the cost of acquisition for bonus shares is Nil, while the cost of the original shares is the actual cost of acquisition of those shares. However, different rules apply if the acquisition of the original shares and the allotment of the bonus shares occurred before April 1, 2001. Here is a summary for reference:
- If both the original shares and the bonus shares were acquired before April 1, 2001:
- The cost of acquisition for the original shares will be the higher of the actual cost or the fair market value (FMV) as of April 1, 2001.
- The cost of acquisition for the bonus shares will be the FMV as of April 1, 2001.
- If the original shares were acquired before April 1, 2001, but the bonus shares were allotted after April 1, 2001:
- The cost of acquisition for the original shares will be the higher of the actual cost or the FMV as of April 1, 2001.
- The cost of acquisition for the bonus shares will be Nil.
- If both the original shares and the bonus shares were acquired after April 1, 2001:
- The cost of acquisition for the original shares will be the actual cost.
- The cost of acquisition for the bonus shares will be Nil.
Holding Period of Bonus Shares:
The holding period for bonus shares commences from the date of allotment of the bonus shares. Below are the details regarding the period of holding for bonus shares allotted by both listed and unlisted companies.
Holding period of Bonus shares of Listed Company:
The holding period for bonus shares of a listed company is 12 months. This means that if the bonus shares of a listed entity are sold within one year from the date of allotment, any profit from the sale is treated as short-term capital gain (STCG). If the holding period for bonus shares of a listed company exceeds 12 months, they are treated as long-term capital assets for taxation purposes. This means that if the bonus shares of a listed company are sold after holding them for more than 12 months from the date of allotment, any profit from the sale is considered long-term capital gain (LTCG).
Holding Period of Bonus Shares of Unlisted Companies:
The holding period for bonus shares of unlisted companies is 24 months. This means that if the bonus shares of an unlisted entity are sold within 2 years from the date of allotment, any profit from the sale is treated as short-term capital gain (STCG). If the holding period exceeds 24 months, the bonus shares of a unlisted company are treated as long-term assets for taxation purposes. This means that if the bonus shares of a unlisted entity are held for more than 24 months from the date of allotment, any profit from the sale is considered long-term capital gain (LTCG).
Income tax Rate on Bonus Shares
1. Income tax on Short term capital gain from Listed Bonus Shares
According to the Income Tax Act, 1961, when any equity share is sold, and security transaction tax is chargeable on it, the rate of short-term capital gain arising on such bonus shares is 15%. However, there’s a beneficial provision for individuals or Hindu Undivided Families (HUFs) who are residents. If the total income, after reducing such short-term capital gains, falls below the maximum amount not chargeable to income tax, then the short-term capital gains are reduced by the shortfall. The tax on the remaining short-term capital gains is then computed at the rate of 15% (fifteen per cent).
2. Income tax on Long term capital gain from Listed Bonus Shares
According to Section 112A of the Income Tax Act, long-term capital gains are taxed at a rate of 10% on the amount exceeding Rs. 1 lakh in a financial year. However, if an individual or a Hindu Undivided Family (HUF), being a resident, has total income (after reducing such long-term capital gains) that falls below the maximum amount not chargeable to income tax, then the long-term capital gains for tax calculation purposes will be reduced by the amount by which the total income (as reduced) is less than the maximum amount not chargeable to income tax.
3. Income tax on Short term capital gain from unlisted Bonus Shares
Short-term capital gains from unlisted bonus shares are taxed at the applicable slab rates. These gains arise when the holding period of the capital asset is less than 24 months.
4. Income tax on Long term capital gain from unlisted Bonus Shares
Long-term capital gains from unlisted bonus shares occur when these shares are held for more than 24 months. Such gains are taxed at an income tax rate of 20%, with the benefit of indexation available.
Example Calculation
Consider an investor who receives 100 bonus shares from a listed company. The investor later sells these shares after holding them for 18 months at ₹200 per share.
- Cost of Acquisition: ₹0 (since bonus shares are given free)
- Selling Price: ₹200 per share
- Total Sale Proceeds: 100 shares * ₹200 = ₹20,000
- Capital Gains: ₹20,000 (since the acquisition cost is zero)
Since the shares were held for more than 12 months, the gains qualify as long-term capital gains.
Record Keeping of Bonus Shares
Proper record keeping is essential for shareholders who receive bonus shares. It is important to keep track of:
- The date of allotment of the bonus shares.
- The number of bonus shares received.
- The original shares’ purchase price and date (for proper calculation of holding period and cost base if required).
Key Takeaways
- No Immediate Tax: Receiving bonus shares does not trigger an immediate tax event.
- Zero Cost of Acquisition: The cost of acquisition for bonus shares is considered zero.
- Capital Gains Tax: The tax liability arises only when the listed bonus shares are sold, determined by the holding period.
- STCG: 15% if held for less than a year.
- LTCG: 10% on gains exceeding ₹1 lakh if held for more than a year.
Conclusion
Bonus shares are a beneficial reward for shareholders, providing additional equity without immediate tax implications. However, understanding the tax treatment upon sale is crucial for financial planning and compliance. By keeping accurate records and being aware of the holding period, shareholders can manage their tax liabilities effectively. As tax laws can evolve, consulting with a tax professional or financial advisor is always advisable to stay informed and compliant.
Disclaimer: The content provided on this blog or website is for informational purposes only. It is not intended to be, and should not be construed as, advice or recommendations of any kind. Always seek the advice of a qualified professional with any questions you may have regarding your specific situation. The information presented here is based on our personal opinions and experiences and should not be relied upon for making any decisions.
