ISSUE OF BONUS SHARES FROM PROFITS
This query is : Resolved
05 February 2010
IF BONUS SHARES ARE ISSUED FROM THE ACCUMULATED PROFITS TO THE SHARE HOLDERS, WHAT IS THE TAXABILITY. DOES IT ATTRACT DIVIDEND TAX OR ANY OTHER KIND OF TAXES EITHER IN THE HANDS OF THE COMPANY OR IN THE HANDS OF SHAREHOLDERS?
MOREOVER, IF SUCH BONUS SHARES ARE SOLD WHAT IS THE PURCHASE CONSIDERATION FOR THE SELLER OF SHARES IN CASE OF CAPITAL GAINS TAX AND WHAT IS THE PERIOD OF HOLDING REQUIRED FOR SUCH BONUS SHARES TO MAKE THEM LONG TERM CAPITAL GAINS?
MOREOVER, IF SUCH BONUS SHARES ARE SOLD WHAT IS THE PURCHASE CONSIDERATION FOR THE SELLER OF SHARES IN CASE OF CAPITAL GAINS TAX AND WHAT IS THE PERIOD OF HOLDING REQUIRED FOR SUCH BONUS SHARES TO MAKE THEM LONG TERM CAPITAL GAINS?
16 February 2010
Can someone please answer my question regarding Bonus issue urgently
02 August 2024
### Tax Implications of Bonus Shares
#### 1. **Taxability of Bonus Shares**
**Bonus Shares Issued from Accumulated Profits:**
- **In the Hands of the Company:** The issuance of bonus shares from accumulated profits is not taxable for the company. It is simply a capitalization of reserves, and there is no immediate tax implication for the company itself.
- **In the Hands of Shareholders:** Bonus shares are not taxable at the time of issuance. The income from bonus shares is not treated as taxable dividend income.
#### 2. **Sale of Bonus Shares and Capital Gains Tax**
**Purchase Consideration:**
- **For Capital Gains Tax Calculation:** The purchase consideration for bonus shares is considered to be zero. The cost of acquisition for bonus shares is deemed to be zero, but for the purpose of calculating long-term or short-term capital gains, you need to take into account the cost of acquisition of the original shares.
**Long-Term vs. Short-Term Capital Gains:**
- **Period of Holding:** Bonus shares are treated as long-term capital assets if the original shares from which the bonus shares were issued are held for more than 12 months. The holding period for bonus shares starts from the date of issue of the bonus shares.
**Calculation of Capital Gains:**
1. **Long-Term Capital Gains (LTCG):**
- **Calculation:** LTCG is calculated as the difference between the sale price of the shares and the "indexed cost of acquisition."
- **Indexed Cost:** The indexed cost of acquisition is calculated using the Cost Inflation Index (CII) from the year of acquisition of the original shares.
2. **Short-Term Capital Gains (STCG):**
- **If Shares Are Sold Within 12 Months:** The gains will be considered short-term and taxed at a rate of 15% (plus applicable surcharge and cess).
**Example Calculation:**
- **Original Shares Cost:** ₹10,000
- **Bonus Shares Issued:** 100 shares
- **Sale Price of Bonus Shares:** ₹15,000
- **Cost of Acquisition for Bonus Shares:** ₹0
- **Capital Gains Calculation:** ₹15,000 (sale price) - ₹0 (cost of acquisition) = ₹15,000 (capital gain)
- **LTCG or STCG:** Depending on the holding period of the original shares, if the holding period is more than 12 months, the gain will be treated as LTCG. If less, then as STCG.
### Summary:
1. **Bonus Shares:** No tax at the time of issuance.
2. **Sale of Bonus Shares:**
- **Purchase Consideration:** Zero.
- **Capital Gains:** Based on the sale price minus the indexed cost of original shares.
- **Long-Term Capital Gains:** If original shares were held for more than 12 months.
- **Short-Term Capital Gains:** If held for less than 12 months.
#### 1. **Taxability of Bonus Shares**
**Bonus Shares Issued from Accumulated Profits:**
- **In the Hands of the Company:** The issuance of bonus shares from accumulated profits is not taxable for the company. It is simply a capitalization of reserves, and there is no immediate tax implication for the company itself.
- **In the Hands of Shareholders:** Bonus shares are not taxable at the time of issuance. The income from bonus shares is not treated as taxable dividend income.
#### 2. **Sale of Bonus Shares and Capital Gains Tax**
**Purchase Consideration:**
- **For Capital Gains Tax Calculation:** The purchase consideration for bonus shares is considered to be zero. The cost of acquisition for bonus shares is deemed to be zero, but for the purpose of calculating long-term or short-term capital gains, you need to take into account the cost of acquisition of the original shares.
**Long-Term vs. Short-Term Capital Gains:**
- **Period of Holding:** Bonus shares are treated as long-term capital assets if the original shares from which the bonus shares were issued are held for more than 12 months. The holding period for bonus shares starts from the date of issue of the bonus shares.
**Calculation of Capital Gains:**
1. **Long-Term Capital Gains (LTCG):**
- **Calculation:** LTCG is calculated as the difference between the sale price of the shares and the "indexed cost of acquisition."
- **Indexed Cost:** The indexed cost of acquisition is calculated using the Cost Inflation Index (CII) from the year of acquisition of the original shares.
2. **Short-Term Capital Gains (STCG):**
- **If Shares Are Sold Within 12 Months:** The gains will be considered short-term and taxed at a rate of 15% (plus applicable surcharge and cess).
**Example Calculation:**
- **Original Shares Cost:** ₹10,000
- **Bonus Shares Issued:** 100 shares
- **Sale Price of Bonus Shares:** ₹15,000
- **Cost of Acquisition for Bonus Shares:** ₹0
- **Capital Gains Calculation:** ₹15,000 (sale price) - ₹0 (cost of acquisition) = ₹15,000 (capital gain)
- **LTCG or STCG:** Depending on the holding period of the original shares, if the holding period is more than 12 months, the gain will be treated as LTCG. If less, then as STCG.
### Summary:
1. **Bonus Shares:** No tax at the time of issuance.
2. **Sale of Bonus Shares:**
- **Purchase Consideration:** Zero.
- **Capital Gains:** Based on the sale price minus the indexed cost of original shares.
- **Long-Term Capital Gains:** If original shares were held for more than 12 months.
- **Short-Term Capital Gains:** If held for less than 12 months.
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