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Taxation on Bonus Shares in India
How bonus shares are taxed in India?
Bonus shares are similar to Dividend but in form of shares instead of cash. Bonus Shares means existing shareholders are given new shares free of cost. These shares are given at pro-rata basis. For instance, if a company announces a bonus of 1:1, every existing shareholder will get one additional share for each share he holds.
The cost of acquisition of these additional shares is taken as Zero.
Why company issues Bonus Shares?
There are two major reasons of issuing bonus shares rather than simply giving out dividend:
1. Attracting more Investors by improving the liquidity of shares: Suppose share price of HUL is Rs.6000 which is out of reach of most of the investors, so what they do is to issue bonus share, say 2:1. Now without having any impact on EPS or on the total investment of investor,price of per share reduces from Rs.6,000 to Rs.2,000. Now, as stock is available at a cheaper price, more investors will entice towards it and hence liquidity of company improves.
2. Tax Saving i.e. shifting the liability of tax from company to share holder: Dividend received by share holder are tax free in hands of share holders u/s 10(34) but attracts dividend distribution tax in hands of company resulting in reduced return to investors. In case of bonus share, no tax is payable by company at all, the liability of tax comes in hands of investors only when he sells these shares. So this is the best way to increase the return as well as reduce the tax liability.
Taxation Aspects on Bonus Shares
Since Bonus Shares are given Free of Cost thus Cost of Acquisition of Bonus Share are always taken as Zero. So one can simply say that selling price of shares are capital gains and one has to pay tax on this.
Period of holding of Bonus Shares are taken from the day of allotment. So if shares are declares on 31st march, 2013 but allotted on 1st April, 2013, the holding period begins from 1st April, 2013.
In the event of sale, FIFO method is used, that is FIRST IN FIRST OUT. So if there is more than one time bonus shares are issued then bonus shares allotted first shall be sold first.
Let’s take an example:
No. of shares purchased on 01-04-2004 100 Purchase price of original shares Rs.100 First Bonus Declares 01-05-2008 2:1 Bonus Shares allotted 31-5-2008 200 Total No. of shares after bonus 300 Second Bonus Declares 01-09-2012 1:1 Bonus share allotted on 30-09-2012 300 Total No. of shares after bonus 600
Suppose investor sells all 600 shares @ Rs.300 on 2nd February, 2013. The tax liability on:
On original 100 shares
Sale Price 30,000 Less: Indexed Cost of Acquisition
[10,000 * (852/480)]
(17,750) Long Term Capital Gains 12,250
On first bonus shares
Sale Price 60,000 COA NIL Long Term Capital Gains 60,000
On Second Bonus Shares
Sale Price 90,000 COA NIL Short Term Capital Gains 90,000
Total Capital Gains comes to Rs.1,62,250 but Long term capital gains on which STT is paid is exempt under section 10(38).
So the taxable gains is only Rs.90,000.
Tax liability: Rs.90,000 * 15% = Rs.13,350
It is always advisable to hold bonus shares for at least one year because capital gains in that case becomes long term which is at present scenario exempt under section 10(38) of the Income-Tax Act, 1961.