How is tax P&L calculated when bonus shares are issued?

General
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Bonus shares have to be held for at least 1 year to avoid tax impact since acquisition price of bonus shares is zero. If sold within 1 year then short term capital gain tax would apply

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Once Share holder’s will receive either receive Bonus, whatever shares received, share is sold before one year it will become short term capital gain, but if he sells after one year it will become long term capital gains

If any Short term gains he need to pay tax @15% of the gain. If it is long term there is no tax.

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Individual shareholder gets free shares in addition to the ones that they actually hold ratio would be declared for example 1:1 ratio if share holder has 100 then he will get 100 more shares then total number of shares become 200 shares, the value of the shares however correct for the bonus ratio with the end result that the value would remain the same. The cost of bonus shares will be exactly the amount that is paid for it This means that the cost for the shares would be zero because there is no amount is paid for the bonus shares.since if you want to sell those bonus shares before 12 months then it will be treated as short term gain there will be 15% of tax will be there if you will keep these bonus shares more then 12 months then it will be treated as long term gain then no tax.

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		<p>Bonus stripping can help investors to reduce capital gains tax. Loss from sale can be adjusted against taxable short- and long-term capital gains from other investments including debt funds, gold and real estate. Short-term gains from stocks and equity funds can be also adjusted against this loss.</p>

	
		<p>Prior to the amendment brought by the Finance (No.2) Act, 2014, to Section 2 (42A) of the Income Tax (IT), 1961, the period of holding for the determination of long-term capital gains on all securities listed on stock exchanges in India was 12 months. As per the amendment by the Finance Act 2014, from 10 July 2014, the holding period for long-term capital gains on non-equity mutual funds has been extended to three years from one year. If an investor sells a debt fund before completing three years, the gains are short term and added to income and taxed at the normal rate.</p>

		<p>As a result of this amendment, investors worried about the high tax they will have to pay on their debt fund investments can consider bonus stripping. Bonus stripping means selling the (original) shares after they become ex-bonus. This results in a short-term capital loss, which can be set off against any other taxable short-term or long-term capital gains.</p>

		<p>Some investors use this strategy to reduce capital gains tax. The loss incurred on bonus stripping can be adjusted against gains from debt funds, stocks, gold, property and equity funds. However, the interest earned on fixed deposits and bonds is not eligible for such adjustment. If the loss cannot be fully adjusted, it can be carried forward for up to eight financial years.</p>

		<p>Here's how bonus stripping works. Suppose 100 shares of a company are bought at the current market price of, say, Rs 3800 each. After the bonus date, the price of the scrip falls. Assuming that it declines 50% to Rs 1900, the saving is 200 shares worth Rs 3.8 lakh. Now, sell the first 100 shares for Rs 1900 each, incurring a notional loss of Rs 1.9 lakh from the sale. The loss can be set off against short-term gains on the sale of debt funds. This is because the purchase price of the original 100 shares will be Rs 3800 each. The acquisition price of the 100 bonus shares will be zero.</p>

		<p>When shares are sold after the bonus date, it will be deemed that the shares already in the portfolio have been sold. So if those shares were bought more than a year ago, the loss is treated as a long-term capital loss and this strategy to save tax will not work. Given that long-term capital gains from stocks and equity funds are tax-free, there is no provision to adjust long-term capital losses from these instruments. Thus, if the original shares are held for more than one year, then bonus stripping will not work. Bonus stripping should result in short-term capital loss.</p>

		<p>However, investors will have to hold the bonus shares for at least one year. Selling them before one year will attract 15% short-term capital gains tax, which will mar some of the gains from bonus-stripping. Tax laws follow the principle of first- in, first-out.</p>
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Bonus shares are issued in proportions and these shares are allotted for free to shareholders. Profit and Loss will be calculated separately for the Original Shares and for Bonus shares allotted when it is sold. If the Original Share is sold after an year or so, it will be treated as Long Term Capital Gain/Loss. For bonsu shares the date of allotment will be considered as date of purchase.

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Bonus shares are shares which are allotted for free to the shareholders.They don’t have to pay anything for purchasing these shares.No tax would be levied at the time of allotment of bonus shares.

Tax would only be levied at the time of sale of such bonus shares. If investor sell those bonus shares within a year, the complete sell value is considered under ‘Short term capital gain’ and 15% tax will be levied on the value.

If they sell after one year it will be considered under ‘Long term capital gain’ and no tax will be levied but this has to be shown when filling ITR.

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Bonus shares are shares which are allotted for free to the shareholders and the shareholders don’t have to pay anything for purchasing these shares.

No tax would be levied at the time of allotment of bonus shares. Tax would only be levied at the time of sale of such bonus shares. If investor sell those bonus shares within a year, the complete sell value is considered under ‘Short term capital gain’ and 15% tax will be levied on the value.

Suppose if selling after one year of Bonus received, it considered under ‘Long term capital gain’ and no tax will be levied but this has to be shown when filling ITR.

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Bonus shares are allotted to the shareholder at free of cost based on the proportion of shares held by him/ her.

In case of Short term capital gain ( holding period less than 12 months)

Tax will be levied 15% on the capital gain (i.e no of shares * selling price )

Whereas incase of long term capital gain .tax will be exempted.

which can also be called as tax loss harvesting.

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In bonus stripping, investors buy shares of companies which have announced bonus issues, and subsequently, sell the original holding at a loss once the stock becomes ex-bonus. This loss can be adjusted against their capital gains on other holdings.
When bonus shares are sold, the cost of such shares will be considered to be nil. If such bonus shares are held for more than 12 months and sold on a stock exchange, the capital gains are exempt from tax (subject to payment of securities transaction tax). If sold within the 12-month period, the capital gains are taxable at 15% (plus surcharge). The cost price of the original shares is not adjusted pursuant to the bonus issue.

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Bonus share

Bonus shares are also known as free shares even though this is misleading. A share is not a hard currency as such but a certificate which depends on the earning and the portion of earning (also known as EPS) for its value. For example, suppose a company has earned 100 crore as profit and it has 1 crore shares outstanding, the earning per share (EPS) will be Rs. 100. This also means your share is ideally earning Rs 100 every year, with some growth.

Now if the company announces bonus share in the ratio of 1:1, means investors will get 1 extra share for every 1 share they hold, the number of shares outstanding will be 2 crore. This will reduce the EPS to Rs. 50. This means your share will earn Rs. 50 per year with some growth. But since you own 2 shares now because of bonus share, your earning will be Rs 100.

Certainly, you will pay much less for a share that earns Rs 50 than a share that earns Rs. 100.

If this is so, what is the use of bonus share?

The use of bonus share is twofold.

It helps improve liquidity of the stock.

When companies issue bonus shares, the number of shares in the market goes up. Since there is more number of shares, the price of shares comes down. Usually, a low price of shares increases its liquidity or trading volume because of the general feeling that the stock is now available at “cheaper” price.

It saves taxes for investors

Bonus shares save taxes both for the company and the investor. These shares are treated like any other share where you pay taxes only when you sell them and earn a profit. If you have sold them before 12 months of getting it, you have to pay short term capital gain taxes. If you sell it after a year of getting it, there is no tax on the gain. The cost of bonus share for the calculation of profit is taken as zero. This explains why bonus shares are considered free shares.

Let’s take an example to calculate the tax. We will only consider short term capital gain taxes.

Investor status

Number of shares bought on 1st Jan 2011

100

Share price when purchased (on 1st Jan 2011)

300

Bonus shares received (on 1 May 2011)

1 to 1

Total number of shares in the account

200

Suppose the investor sells 100 shares on 1st Dec, 2011 at Rs 310 per share. Since this is short term gain. He or she will have to pay taxes on the gain 100 * (310-300) = Rs 1000. The tax rate is 15%.

Now suppose the investor sells other 100 shares on 1st Mar, 2012 at Rs 310 per share. Since the sale happened before 1 year of issuance of bonus share, he or she will have to pay short term capital gain tax at 15% of the profit. However, in this case the tax liability will be different. As explained earlier, the acquisition price of bonus share is taken as zero. Hence the short term capital gain will be 100 * (310 – 0) = Rs 3100 and you will have to pay tax on the gain of Rs 3100.

If you sell them after a year, you don’t have to pay taxes on capital gain. This is where the advantage of bonus share comes in for investors.

A note on bonus stripping

When bonus shares are issued, the price of shares falls. Hence there may be opportunity to sell the original shares and book notional loss. This loss can be offset against short term capital gains to save taxes. At the same time, you have the bonus share with you anyway which can be sold at a later date to earn profit. We will give more on this in our later article. Income tax officials introduce different ways to tackle this. This doesn’t mean you should not do it. You must take advantage of the system. Income tax department has introduced few rules which have to be followed and you can use bonus share to save taxes and make profit.

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This can be best illustrated with an example.

Lets say Mr Smart an active customer at Zerodha, buys 100 shares of a company on 1-7-2011 at Rs. 50 each.

On 9-11-2013, the company allotted bonus shares in the ratio 1:1.This basically means that for every 1 share held, the company would be allotting 1 bonus share.

Therefore in the above example as Mr Smart holds 100 shares, he would be allotted 100 shares as bonus.

So the total shares held by Mr. Smart on 9-11-2013 are 200.

Now on 9-10-2014, Mr Smart sells all his 200 shares at a price of Rs 200.

In such a case the Capital Gains would be computed separately for the original shares and bonus shares as explained below :

Capital Gain on sale of original 100 shares purchased @ 50 each

Particulars Amount
Selling Price (100200) 20000
Cost of Acquisition (10050) 5000
Expenses on Transfer (assumed Nil) Nil
Capital Gains on sale of Original Shares 15000

Capital Gain on sale of 100 Bonus shares :

Particulars Amount
Selling Price (100200) 20000
Cost of Acquisition (1000) 0
Expenses on Transfer (assumed Nil) Nil
Capital Gains on sale of Bonus Shares 20000

Tax Computation :

No tax would be levied at the time of allotment of such bonus shares .Tax would only be levied at the time of sale of such bonus shares as below :

Original shares -:
quantity : 100
purchase date : 1-7-2011
selling date : 9-10-2014
Capital Gains on sale of Original Shares : 15000
Period of Holding > 1 year ; (holding-period more than a year)

Rs. 15,000 will be termed as “Long Term Capital Gains” (LTCG) and exempted from tax (Under Section 10(38) Mr Smart to file details of LTCG in ITR-2 ).

Bonus Shares -:

quantity : 100
purchase date (allotment date) : 9-11-2013
selling date : 9-10-2014
Capital Gains on sale of Bonus Shares : 20000

Period of Holding < 1 year ; (holding-period less than a year)

“Short Term Capital Gain” (STCG) tax is flat 15% independent of income-tax slab.
In this case tax to be paid is : Rs. 3000 and need to be specified by Mr Smart while filing ITR-2 against STCG

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Bonus shares are allotted for free to the shareholders, no tax would be levied at the time of issue of bonus share. At the time of sale of shares, Capital Gains Tax is levied depending on the nature of the capital gains, If the Capital Gains are Long Term in Nature, such gains would be exempted from capital gains tax and in case such gains are short term in nature, such gains would be taxable at the rate of 15%.

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The income tax applicable for only the capital gain which is gained with in one year or else there is no income tax applicable for the shares which is held more than one year. Especially in this case the bonus shares also considered as normal equity share once the number of shares credited to account then only the number of days of holdings will be calculated.

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Bonus shares save taxes both for the company and the investor. These shares are treated like any other share where you pay taxes only when you sell them and earn a profit. If you have sold them before 12 months of getting it, you have to pay short term capital gain taxes. If you sell it after a year of getting it, there is no tax on the gain. The cost of bonus share for the calculation of profit is taken as zero. This explains why bonus shares are considered free shares.

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There is no tax implication when bonus shares are awarded. But when they are sold, they may be taxable, depending on the time for which they are held. The taxman considers the cost of these bonus shares nil.

Let’s say X holds 100 shares of Company A which were bought for Rs 1, 000. After declaring a 1:1 bonus, X was allotted another 100 shares. Capital gains will be computed on the basis of difference between sale consideration and cost of acquisition. The cost of original shares is Rs 1, 000 while the cost of bonus shares will be considered nil.

If shares held for more than 12 months are sold on a recognised stock exchange and Securities Transaction Tax has been paid, capital gains (long term) arising on the sale is exempt from tax. But if the same shares are held for less than 12 months, capital gains (short-term) are taxable at 15% plus education cess.

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Bonus shares are issued in proportions and these shares are allotted for free to shareholders. Profit and Loss will be calculated separately for the Original Shares and for Bonus shares allotted when it is sold.

No tax would be levied at the time of allotment and tax would be levied on sales of those shares. If investor sell those bonus shares within a year, the complete sell value is considered under ‘Short term capital gain’ and 15% tax will be levied on the value.

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Bonus shares are shares which are allotted for free to share holder and shareholder do not have to pay anything for purchasing these shares.While selling bonus shares held more than a year is considered as long term capital gain so there is no tax levied. and when bonus shares are sold within a year it is considered as short term capital gain tax and it will attract tax of 15%.

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Bonus shares those which are allotted for free of cost to the shareholders and the shareholders don’t have to pay anything for purchasing these shares. P and L will be calculated separately for the Original Shares and for Bonus shares allotted when it is sold

No tax would be levied at the time of allotment of bonus shares. Tax would only be levied at the time of sale of such bonus shares. If investor sell those bonus shares within a year, the complete sell value is considered under ‘Short term capital gain’ and 15% tax will be levied on the value, Whereas incase of long term capital gain tax will be exempted.

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Bonus shares are issued for free to the existing share holders of the company. The date of allotment of such shares is considered as the date of acquisition and the period of holding is calculated accordingly. If the period of holding is more that one year (12 months) it is exempted form tax, and if it is less than 12 months (short term capital gain) it is taxable at 15% of the value.