Bonus shares behave differently from purchased shares when it comes to capital gains — and the difference catches a lot of investors off guard at filing time.
The cost of acquisition is nil
When a company issues bonus shares, shareholders don't pay anything for them. Because of that, the cost of acquisition for tax purposes is treated as nil. There is no purchase price to index or carry forward — the entire sale value, when the shares are eventually sold, becomes the gain.
The holding period starts at allotment
The acquisition date for bonus shares is the date of allotment, not the date the original shares were bought. This matters because it determines whether a sale qualifies as long-term (held over 12 months for listed equity) or short-term — and bonus shares often have a much shorter holding period than the original holding they came from.
Where Section 112A comes in
If the bonus shares are listed equity shares or equity-oriented mutual fund units, held long-term, and the transaction is subject to securities transaction tax, the gain falls under Section 112A. This taxes long-term capital gains on such instruments at a flat rate, after allowing an annual exemption threshold across all Section 112A gains for the year — rather than under the general slab-rate or indexed-cost regime that applies to other capital assets.
What this means for record-keeping
Anyone who has received bonus shares needs to track the allotment date and quantity separately from the original holding, since they're treated as distinct lots for capital-gains purposes. Brokers' capital gains statements don't always separate this cleanly, which is usually where errors creep into self-filed returns.
If you've received bonus shares and are unsure how a sale will be taxed, it's worth getting the lot-wise computation checked before you file — particularly where there's been more than one bonus issue or a stock split layered on top.