We know that making investment in securities/shares is one of the common investment avenue available to an individual in addition to making fixed deposits, purchasing land or building etc.
In shares, bonus shares are often issued by the company. Bonus shares are used by the company as one of the method of capitalizing their profit and to improve the marketability and liquidity of the shares in the stock market (since number of shares increases and price per share falls after issue of bonus shares).
Any profit or loss arising on sale and purchase of shares / securities falls under the head “Capital Gain” (Except Business Income for those who are involved in to the business of sale and purchase of shares)
In this article we will discuss about tax advantage available to an individual in case of bonus shares.
Before that let’s understand the existing tax structure on Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG).
Existing Capital Gain tax structure for FY 2019-20 for Individual
| Nature of Capital Asset | Short Term Capital Asset | Long Term Capital Asset | STCG Tax Rate | LTCG Tax Rate |
| Listed Securities (other than unit e.g. Shares, Debentures, Bonds, etc) in a recognised Stock Exchange in India | Holding <= 12 months | Holding > 12 months | 15% | NIL upto Rs 1 Lac.
Beyond Rs 1 lac: – 20% with Indexation benefit – 10% without indexation benefit |
| Unlisted shares (Both equity and Preference) | Holding <= 24 months | Holding > 24 months | Slab rate | 20% with Indexation benefit |
| Unlisted securities other than shares (like debentures) | Holding <= 36 months | Holding > 36 months | Slab rate | 20% with Indexation benefit |
In the case of listed securities for determining which stock is sold out FIFO (First In First Out) method is applied i.e oldest stock is assumed to be sold first.
In case of Bonus shares, additional shares are given free of cost based on the ratio of bonus (i.e 1:1, 1:3 etc). Many a times these bonus shares are used by investors to reduce their income tax liability.
Some related examples for better understanding:
| S.N | Particulars |
Case 1 |
Case 2 | Case 3 | Case 4 |
Case 5 |
| a | Existing number of listed shares held |
100.00 |
100.00 | 100.00 | 100.00 |
100.00 |
| b | Existing Cost per share (Rs) |
400.00 |
400.00 | 480.00 | 480.00 |
300.00 |
| c | Period of holding on 15.03.20 |
13 months |
2 months | 5 days | 5 days |
2 months |
| d | Bonus ratio on 15.03.20 |
1:1 |
1:1 | 1:1 | 1:1 |
1:1 |
| e | Price just before bonus share (Rs) |
500.00 |
500.00 | 500.00 | 500.00 |
500.00 |
| f | Price immediately after bonus share (Rs) |
250.00 |
250.00 | 250.00 | 250.00 |
250.00 |
| g | No of shares sold after bonus issue |
100.00 |
100.00 | 100.00 | 200.00 |
100.00 |
| h | Sale consideration (f*g) |
25,000.00 |
25,000.00 | 25,000.00 | 50,000.00 |
25,000.00 |
| i | Cost of acquisition (b*g) (Max a*b) |
40,000.00 |
40,000.00 | 48,000.00 | 48,000.00 |
30,000.00 |
| j | Long Term Capital Gain / (Loss) (h-i) |
(15,000.00) |
||||
| k | Short Term Capital Gain / (Loss) (h-i) |
(15,000.00) |
(23,000.00) | 2,000.00 |
(5,000.00) |
|
| l | Remaining No of Bonus shares |
100.00 |
100.00 | 100.00 | – |
100.00 |
| m | Cost of acquisition for Bonus shares |
NIL |
NIL | NIL | NIL |
NIL |
Case 1) In case 1 Mr X was holding 100 number of listed shares of a company say ABC Ltd since last 13 months. The acquisition price per share was Rs 400. Hence total cost was Rs 40,000/-.
Now ABC Ltd issues bonus shares in the ratio of 1:1 (i.e 1 bonus share for every 1 share held). Hence Mr X will get additional 100 shares as bonus share.
Say price before bonus issue was Rs 500 per share and immediately after bonus issue price became Rs 250 (i.e half of Rs 500). Now if Mr X sold 100 shares then for the purpose of determining cost of acquisition FIFO method will be applied and the cost for first 100 shares will become Rs 40,000 and cost of remaining 100 bonus shares will be Nil.
Sale consideration for 100 shares will be Rs 25,000 (i.e sale price X number of shares) and there will be Long term Capital Loss of Rs 15,000 which can be set off against other Long term capital Gain. (However there is a school of thought that since the income would have been exempt u/s 10(38) so loss should also be exempt and this loss can not be adjusted against non exempt sources).
Case 2) In case 2 Mr X was holding 100 number of listed shares of a company say ABC Ltd since last 2 months. The acquisition price per share was Rs 400. Hence total cost was Rs 40,000/-.
Now ABC Ltd issues bonus shares in the ratio of 1:1 (i.e 1 bonus share for every 1 share held). Hence Mr X will get additional 100 shares as bonus share.
Say price before bonus issue was Rs 500 per share and immediately after bonus issue price became Rs 250 (i.e half of Rs 500). Now if Mr X sold 100 shares then for the purpose of determining cost of acquisition FIFO method will be applied and the cost for first 100 shares will become Rs 40,000 and cost of remaining 100 bonus shares will be Nil.
Sale consideration for 100 shares will be Rs 25,000 (i.e sale price X number of shares) and there will be Short term Capital Loss of Rs 15,000 which can be set off against other Long as well as short term capital Gain.
Case 3) In case 3 Mr X was holding 100 number of listed shares of a company say ABC Ltd since last 5 days. The acquisition price per share was Rs 480. Hence total cost was Rs 48,000/-.
Now ABC Ltd issues bonus shares in the ratio of 1:1 (i.e 1 bonus share for every 1 share held). Hence Mr X will get additional 100 shares as bonus share.
Say price before bonus issue was Rs 500 per share and immediately after bonus issue price became Rs 250 (i.e half of Rs 500). Now if Mr X sold 100 shares then for the purpose of determining cost of acquisition FIFO method will be applied and the cost for first 100 shares will become Rs 48,000 and cost of remaining 100 bonus shares will be Nil.
Sale consideration for 100 shares will be Rs 25,000 (i.e sale price X number of shares) and there will be Short term Capital Loss of Rs 23,000 which can be set off against other Long as well as short term capital Gain.
Conclusion
Hence we can see that by way of investing into shares which are about to issue bonus shares, one can reduce his overall tax liability.
That’s why it has been observed that prices after bonus issue falls higher than the ratio of bonus issue because everyone tries to liquidate their position which creates huge selling pressure in the market and as a result prices falls disproportionately during the initial phase after bonus issue.
Above strategy is called Bonus stripping.
If one can prove that acquisition and disposal of the shares was not done with the main objective of tax avoidance, then as per current rules, one can well set off the loss on bonus stripping. However if it can be proved that bonus stripping was done only with the motive of tax avoidance then assessing officer may apply cost on proportionate basis between original and bonus shares.
(Republished with Amendments)
Author Bio
This doesnt appear to be a fair treatment. Averaging the cost seems fair and rational. A 1:1 bonus drops the price to half and if one sells the shares in tranches, across financial year, one ends up paying tax on purchase price as well
I prched biocon share dtd-18. 10.04;24.08.07;8.10.08 eachnos. 25/total-75.bonus rec. 50/20.9.08second bonus 250/27.6.17 & third bonus 375/13.06.19 I sold alll share on 4.2.21 how can calculate LTCG pls sudjest me. Thanks
How to show bonus debenture sale in ITR 2
I had purchased 100 shares of BSE Ltd in 2007 offline (without paying STT, as the shares were not listed in 2007). In 2009, BSE declared 12 bonus shares per share. So after bonus my holding became 1300. On 31.1.2018 price quoted on NSE was 892/-. I have not sold anything from the 1300 shares. If I sell the 1200 bonus shares now, what will be the calculation of LTCG tax? My LTCG will be taxed at 10% or 20%? I had not paid any STT on those 1200 bonus shares as it was given by the company directly to me by way of bonus. Pls guide, giving relevant provisions/circulars/notifications as applicable.
Hi
Cost of bonus shares which was allotted on or before 31/01/2018 shall be the FAIR MARKET VALUE as on 31/01/2018 ( ie Market price of BSE as on 31st of Jan in your case ₹892)
Even though STT was not paid for certain share acquisitions (CBDT has given clarification on that ) Section 112a shall be applied ie pay tax on capital gains at rate of 10%(LTCG) or 15% ( STCG sec 111A)
In that circular CBDT said that for certain transactions it will be enough if STT is paid on Transfer of such shares through Recognised Stock Exchanges in India
Please refer circular Notification No. 60/2018 dated 01.10.2018
What is the cost of bonus shares in the following case
Shares held as on 31-01-2018 is 100 shares. Cost per share Rs 3200. Bonus shares received during Nov 2018 is 75 shares. Quoting relevant provisions of IT Act, Rules, Circulars, QAs from CBDT will be more helpful,
good
Tell us something about fixed deposits and their calculations as regards tax. we seem to pay tds but somehow while filing returns end up paying more tax.
hi