What Is a Bonus Issue?
A bonus issue is when a company gives its existing shareholders additional shares free of charge, in proportion to the shares they already hold. No money changes hands. The company simply capitalises a portion of its accumulated reserves (such as free reserves or the securities premium account) and converts it into new share capital.
Because the shares are issued out of money that already belonged to shareholders, a bonus issue does not bring in fresh cash and does not change the company's net worth. It only increases the number of shares outstanding. This is why a bonus issue is also called a capitalisation of reserves.
A bonus issue is different from a stock split. In a bonus issue, reserves move into share capital and the face value per share stays the same. In a split, the face value itself is divided (for example, a ₹10 face value becomes two ₹5 shares) and reserves are untouched. Both increase share count and reduce the per-share price, but the accounting is different.
Ratio Mechanics: 1:1 and 2:1
A bonus is announced as a ratio in the form X:Y, meaning X new bonus shares for every Y shares already held. The ratio tells you exactly how many free shares you receive.
- 1:1 — one bonus share for every one share held. Your share count doubles.
- 2:1 — two bonus shares for every one share held. Your share count triples.
- 1:2 — one bonus share for every two shares held. Your share count rises by 50%.
New Total Shares = Original Shares × (X + Y) ÷ Y
The market price adjusts so that your total wealth is unchanged. The theoretical post-bonus price falls in the same proportion that the share count rises:
Adjusted Price = Original Price × Y ÷ (X + Y)
Worked Example: Wealth Stays the Same
Suppose you hold 100 shares of a company trading at ₹600 each, and the board declares a 1:1 bonus. These figures are illustrative.
| Item | Before Bonus | After 1:1 Bonus |
|---|---|---|
| Shares held | 100 | 200 |
| Price per share | ₹600 | ₹300 |
| Total value | ₹60,000 | ₹60,000 |
Before the bonus, your holding is worth 100 × ₹600 = ₹60,000. After a 1:1 bonus your share count doubles to 200. The price adjusts to ₹600 × 1 ÷ (1 + 1) = ₹300. Your holding is now 200 × ₹300 = ₹60,000 — exactly the same. You own a larger number of cheaper shares, but no value was created out of thin air.
If the bonus were 2:1 instead, you would receive 200 bonus shares, taking your total to 300, and the price would adjust to ₹600 × 1 ÷ 3 = ₹200. Total value: 300 × ₹200 = ₹60,000. The arithmetic always conserves total wealth — the per-share metrics fall, not the value of your stake. For the same reason, the company's earnings per share drops proportionally after a bonus, since the same profit is now spread over more shares.
Why Companies Issue Bonus Shares
A bonus issue creates no new value, so why bother? Companies use it for signalling and liquidity reasons rather than to enrich shareholders directly.
- Improving liquidity — a lower per-share price makes the stock more affordable to retail investors and can increase trading volume.
- Signalling confidence — capitalising reserves signals that the board expects sustained earnings able to support a larger equity base.
- Rewarding shareholders without cash outflow — unlike a dividend, a bonus conserves cash, which the company can keep for growth.
- Rebalancing capital structure — moving reserves into paid-up capital reflects retained profits permanently as share capital.
A bonus differs sharply from a cash dividend. A dividend pays out cash and reduces the company's reserves and cash balance; a bonus only reshuffles reserves into share capital within the balance sheet and keeps the cash inside the company.
The Key Dates You Must Track
Three dates govern who is eligible for a bonus and when the shares can be traded.
- Announcement date — the day the board approves the bonus and discloses it to the exchanges. SEBI requires the issuer to apply for in-principle exchange approval within five working days of that board meeting.
- Record date — the cut-off day. Whoever is on the company's register of shareholders at the end of this day is entitled to the bonus.
- Ex-bonus date — under the T+1 settlement cycle, this is the day from which the stock trades without the bonus entitlement. Buyers from this date on will not receive the bonus; this is when the price adjusts downward for the bonus.
Under SEBI Circular CIR/CFD/PoD/2024/122 (dated 16 September 2024), for all bonus issues announced on or after 1 October 2024, the record date is treated as T. The deemed date of allotment is T+1, and the bonus shares become available for trading on T+2. SEBI also removed the old temporary-ISIN requirement, so bonus shares are credited directly into the company's existing permanent ISIN.
How Bonus Shares Are Taxed in India
Receiving bonus shares is not a taxable event — there is no tax at the point of allotment. Tax arises only when you eventually sell them, as capital gains. Three rules drive the calculation.
- Cost of acquisition is zero — under the Income Tax Act, bonus shares are deemed to have a cost of acquisition of nil. So the entire sale price (net of charges) is the capital gain.
- Holding period starts from allotment — the holding period of bonus shares is counted from their date of allotment, not from the date you bought the original shares. The original shares and the bonus shares are tracked separately.
- Taxed as capital gains on sale — for listed shares, a holding of 12 months or less from allotment is short-term; more than 12 months is long-term.
Example (illustrative): you receive a bonus share at a market price of ₹300 and sell it 14 months later for ₹400. Because the cost is treated as ₹0, the entire ₹400 — not the ₹100 difference — is the long-term capital gain on that share, since it was held for more than 12 months from allotment. For unlisted companies the long-term threshold is 24 months. Compare this with the original shares, which carry their actual purchase cost.