If a company declares a bonus out of undivided capitalized profits and allots to its shareholders in satisfaction of the bonus unissued shares in the company as fully paid up, the shares so allotted are known as bonus shares and they are capital and not income in the hands of shareholders. An issue of bonus shares is referred to as a bonus issue.
An issue of bonus shares on capitalisation of profits does not entail payment of any tax either for the company or its shareholders. When bonus shares are sold, the cost of such shares will be considered to be nil. If such bonus shares are held for more than 12 months and sold on a stock exchange, the capital gains are exempt from tax (subject to payment of securities transaction tax). If sold within the 12-month period, the capital gains are taxable at 15% (plus surcharge). The cost price of the original shares is not adjusted pursuant to the bonus issue.
The aforesaid taxation provisions provide an interesting tax planning avenue. Investors holding original shares (if held for 12 months or less) can immediately, post the bonus issue, sell such shares, which will result in a loss; this loss can be utilised to offset other taxable capital gains earned by the investor, during the year.
Economically, however, bonus issues do not cause any loss to the investor.
12 April 2012
Agree with expert. Its a capital receipt and the cost of such bonus shares is considered as NIL. Also, the company declaring bonus is not liable to pay any dividend distribution tax on such bonus issue.
13 April 2012
Taxation of Bonus Shares As the Bonus shares are received free of cost, the Cost of such shares is taken as NIL. As mentioned earlier, there is no taxation of notional gain (Market value minus cost which is NIL) at the time of allotment of Bonus Shares. However the Sale of such shares attracts Capital Gains and the same is chargeable to tax. The taxation of Bonus shares can be explained with the help of following example. Example:- Mr. X was holding 100 Equity Shares in ABC Ltd. At the cost of Rs. 10/- per share as on 1st April 2010. On 30th September 2010, he was allotted 50 Bonus Shares (market value on the date of allotment Rs. 15/- per share). Due to further appreciation he decided to sell 140 Equity Shares(1,00 original shares plus 40 Bonus shares) @ Rs. 20/- per share on 1st March 2011. His Capital Gains will be as under: Particulars Original 100 shares 40 Bonus Shares Sale Consideration @ Rs. 20/- per share 2000 800 Less:- Cost of Purchase @ Rs. 10/- Share 1000 N I L Capital Gains 1000 800 Tax on above @ 10% 100 80 Thus it can be seen from the above example that in case of Sale of Bonus shares, entire sale consideration is treated as Capital Gains as cost of BonusShares is NIL. The cost of remaining 10 shares in the hands of Mr. X would be NIL. The notional gain of Rs. 750/- (50 shares @ Rs. 15/- per share) at the time of allotment of Bonus shares is not taxable.
14 April 2012
The experts have very nicely explained you the concept of Bonus and issue of Bonus share which is a capital receipt on capitalisation of undistributed profits of the company and the company has already paid the income tax on that undistributed profit and accordingly the experts have done a good job to explain the matter. I agree with them
17 September 2012
Bonus shares received by an Individual are taxable as income from other under section 56 if the value of bonus shares received (lowest value in the day) exceeds Rs.50,000/-. The entire receipt becomes taxable if the value of bonus shares received and other properties or money received by assessee from other than relatives exceeds Rs.50,000/-. If the aggregate of Bonus Shares and other immovable property, movable property and cash from other than relatives is less than Rs.50,000 then there is no tx. If greater than 50,000 then entire receipt is taxable without any tax free slab.
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