Free additional shares issued by a company to existing shareholders from its reserves, in a fixed ratio like 1:1 or 1:2, without changing the total investment value.
A bonus issue is when a company distributes additional shares to existing shareholders free of cost, in proportion to their existing holdings. For example, a 1:2 bonus means one new share for every two shares held — a shareholder with 200 shares receives 100 additional shares, bringing the total to 300.
The company funds bonus shares by capitalising its free reserves (retained earnings, share premium). No new capital enters the company — it is an accounting adjustment. The share price adjusts proportionally on the ex-bonus date. If a stock trades at Rs 900 before a 1:1 bonus, it opens at approximately Rs 450 on the ex-date, as the same company value is now divided among twice the number of shares.
In India, bonus issues are common among profitable companies with large accumulated reserves. Prominent examples include Reliance Industries (1:1 bonus in 2017), Infosys (1:1 bonus in 2018), and TCS (1:1 bonus in 2018). Companies announce bonus issues to improve stock liquidity by reducing per-share price, reward long-term shareholders, and signal confidence in future earnings.
SEBI regulations require companies to issue bonus shares within 15 days of board approval. The record date determines eligibility — shareholders who hold the stock on the record date receive the bonus shares in their Demat Account. Bonus shares carry the same rights as existing shares, including Dividend entitlement and voting rights.
From a tax perspective, bonus shares are not taxable at the time of receipt. However, when sold, the cost of acquisition for bonus shares is zero (for shares issued after 31 January 2018), and the holding period starts from the date of allotment. So if bonus shares are sold within 12 months, the entire sale proceeds above zero cost are subject to Short-Term Capital Gains Tax at 20%. For long-term holdings (above 12 months), gains above Rs 1.25 lakh are taxed at 12.5%.
India Context
SEBI requires bonus issuance within 15 days of board approval. Cost of acquisition is zero for bonus shares issued after 31 Jan 2018. Must be approved in AGM if reserves are being capitalised.