On this page
# Tax on Bonus & Split Unlisted Shares
Bonus issues and stock splits are common corporate actions in unlisted companies preparing for growth or an eventual IPO. They change the number of shares you hold, but they are not the same thing — and they are taxed very differently when you eventually sell.
This article explains the cost of acquisition and holding period for bonus shares and split shares, and how FIFO decides which shares are sold first.
Disclaimer: This is educational content, not tax advice. Corporate actions can interact with your specific purchase history in subtle ways. Consult a chartered accountant for your situation.
Bonus Shares: You Paid Nothing, So Cost Is Nil
A **bonus issue** is when a company allots extra shares to existing shareholders free of cost, out of its reserves. If you held 100 shares and the company declares a 1:1 bonus, you now hold 200 shares — but you paid nothing for the extra 100.
The tax treatment follows directly from this:
- Under Section 55, the cost of acquisition of bonus shares is nil (for bonus shares allotted on or after 1 April 2001).
- Your original shares keep their actual cost.
So when you sell bonus shares, the entire sale price is your capital gain, because there is nothing to subtract.
### Worked Example — Bonus
- You bought 100 shares at ₹400 = ₹40,000.
- Company declares a 1:1 bonus: you receive 100 bonus shares at nil cost.
- You later sell all 200 shares at ₹500 = ₹1,00,000.
Capital gain calculation:
- Original 100 shares: ₹50,000 sale − ₹40,000 cost = ₹10,000 gain.
- Bonus 100 shares: ₹50,000 sale − ₹0 cost = ₹50,000 gain.
- Total gain = ₹60,000.
The bonus shares do not dilute your tax — they concentrate the gain, because their cost is zero.
Holding Period of Bonus Shares Starts Fresh
This is the part investors most often get wrong. The holding period of bonus shares is measured from the date of allotment of the bonus shares — not from when you bought the original shares.
- Original shares: holding period from your purchase date.
- Bonus shares: holding period from the bonus allotment date.
So you can easily be in a position where your original shares are long-term (held more than 24 months) while your bonus shares are still short-term. You must compute gains on the two lots separately, applying the right rate to each.
Stock Splits: Cost Is Spread, Period Carries Over
A **stock split** divides each existing share into several shares of smaller face value. A 1:5 split turns one ₹50 face-value share into five ₹10 face-value shares. Unlike a bonus, nothing new is created — your single holding is simply subdivided.
Tax treatment:
- A split is not a taxable event on its own.
- The original cost is spread proportionately across the larger number of shares.
- The holding period carries over from the original shares — there is no fresh clock.
### Worked Example — Split
- You bought 100 shares at ₹500 = ₹50,000, in January 2022.
- In 2024 the company does a 1:5 split. You now hold 500 shares.
- New cost per share = ₹50,000 ÷ 500 = ₹100 per share.
- Holding period still runs from January 2022 for all 500 shares.
If you sell in 2025, all 500 shares are long-term, and your cost base is the original ₹50,000.
FIFO: Which Shares Are Sold First
When you hold multiple lots — original, bonus, split, or purchases on different dates — and you sell only part of your holding, the First-In-First-Out (FIFO) rule decides which shares are treated as sold.
For dematerialised shares, FIFO is the prescribed method: the earliest-acquired shares are sold first. This determines:
- Which cost of acquisition applies (original cost vs nil-cost bonus).
- Whether the gain is short-term or long-term.
### Example — FIFO With Bonus
- January 2022: bought 100 shares at ₹400.
- June 2024: received 100 bonus shares (nil cost).
- August 2025: sell 120 shares.
Under FIFO, you are treated as selling:
- The 100 original shares first (cost ₹400 each, long-term), then
- 20 of the bonus shares (nil cost, holding period from June 2024 — long-term as held over a year… check 24-month rule for unlisted).
You must apply the 24-month test to each lot to classify the gain correctly.
Quick Reference
- Bonus shares: cost = nil; holding period from allotment date.
- Split shares: original cost spread across more shares; holding period carries over.
- Sales: FIFO decides which lot is sold first.
- Rate: long-term gains taxed at 12.5% (post-23 July 2024 regime); short-term at slab rate.
*Published by the Polemarch editorial team. Not tax advice — consult a chartered accountant.*