Bonus Shares Query - Are they counter-productive to investors in short term?

Taxation
1

Hi,

I am trying to understand the implications of Bonus Shares. My query refers to the following Zerodha Varsity article.
Zerodha Varsity - How are dividends, bonuses, splits, buy-backs and mergers of shares taxed.

According to the article the COA of Bonus Shares is considered to be Rs. 0 & DOA is the date of issue of the bonus shares. My query is as follows.

Lets say, I hold 100 shares (long term) of ABC company with current share price of Rs. 2000. I am thinking of selling all of them soon. If I do, then my capital gain would be Rs. 2 Lacs & it would fall under LTCG. However, lets say, in the mean time, the company declares 1:1 bonus shares & accordingly I get 100 more shares, but, now the share price is adjusted accordingly & it becomes Rs. 1000 per share. I sell all the shares. My gain is Rs. 2 Lacs. However, now only Rs. 1 Lac is LTCG & the remaining Rs. 1 Lac is STCG!

1.) Is the above assumption correct?

2.) If it is correct, then it means there is no immediate benefit of Bonus Shares for the investor. In fact, it is counter-productive & disadvantageous in the short term as now he/she is locked in for a further 12 months in order to re-enter LTCG. For example, in my example above in order to gain Rs. 2 lacs as LTCG I am locked in for further 12 months unless the share price doubles immediately, which is highly improbable.

Thanks!

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2

This is correct. :slight_smile:

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3

Thanks for the reply. The article you linked, though a good read, does not really apply to my example since no new shares are being bought.

4

very valid query @Akash_Shah. Can you please answer this time permitting.

In the above example, the way I understand, the profit value will remain the same as the number of shares has doubled and market price reduced.

However, my gain which is still 2L will now be under LTCG 1 L and STCG 1 L.

If I sold before bonus shares, my tax liability will be LTCG of 2 l of which exemption 1.25 and net 75K under 12.5% tax.

If I hold on then my tax liability will be LTCG of 2L of which exemption will be 1 L and remaining 1 L will be at 20%.

or
Example

Market price before bonus 2000
original shares held 100 at coa 1100. net profit = 90,000

Now bonus is issued
original shares 100 at cost of 1100
Bonus issued 100 at cost of 0
Market price goes to 1000.

Will it be original lot of 100 will now be 100 x 1000 = 100000 and capital loss as coa is 100 x 1100 = 110000 - Capital loss of 10,000.

Bonus 100 x 1000 = 100000. Therefore total net profit will be 90,000

Tax liability will be zero tax on first lot where there is capital loss and for second lot, as it is stcg of 1 Lakh stcg. The capital loss of 10,000 from the first lot sale will offset the capital gain and net tax liability will be 90,000 at 20%.

Am I correct or wrong.

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5

You are slowly learning. Proud of you :slight_smile:

Taxation will work as per your second example, that is you will be making Capital loss on original 100 shares (so no tax, but you can actually offset it against any other gain you might have) and full STCG on remaining 100 shares.

Nope, in fact as @neha1101 explained in second example, you will most likely make loss on original lot (depending on cost of acquistion) and and gain on bonus shares

This depends, if you planning to sell the share immediately than it is disadvantageous. Then you should sell it before ex-date.

But in lot of situation this is useful, especially if you are long term holder and plan to continue holding on to share anyways.
Because, now you can sell your original share and book loss, which can be used to offset your any other capital gains. This way you can defer your taxation (subject to bonus stripping rules)

So if you are a long term holder of share, it can be useful

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