Sold entire long-term RIL stock holding after bonus shares? It's time to pay STCG tax
Aditya Bhattacharya, Partner, King Stubb & Kasiva, Advocates and Attorneys said the general rule remains that bonus shares are taxed based on the holding period after receipt.
- May 26, 2025,
- Updated May 27, 2025 7:21 AM IST
Bonus shares are new shares issued at the existing face value of the company and, therefore, attract short-term capital gains tax (STCG) at 20 per cent if sold within 12 months of the receipt. This would be the case for long-term investors of Reliance Industries (RIL), who sold their entire RIL stock holding within FY25 following the October 2024 bonus issue of 1:1. Half of the shares sold would attract 20 per cent STCG tax, as investor file income tax returns for the financial year.
"The tax treatment of bonus shares under the Income Tax Act, 1961, particularly section 55(2)(aa)(iii-a), is a stark example of a rigid legal framework that penalises investors for circumstances often beyond their control," said Sonam Chandwani, Managing Partner KS Legal & Associates said.
Chandwani gave an example of an investor, who held 100 RIL shares for five-long years, received 1:1 bonus issue in October 2024 but sold entire holding by March 2025.
Chandwani said the original 100 shares would attract a favorable 10 per cent LTCG tax under section 112A, with a Rs 1 lakh exemption.
"However, the bonus shares, despite being a mere reallocation of corporate profits, are assigned a nil cost and a fresh holding period, resulting in a 20 per cent STCG tax under section 111A on their full sale value. This creates a disproportionate tax burden, as half the proceeds from bonus shares are taxed at double the rate of LTCG, despite the investor’s long-term commitment," she said.
Rajarshi Dasgupta, Executive Director-Tax at AQUILAW said when a company gives out bonus shares, it rewards an existing shareholder without asking for any cash payment. Such a process is considered as a capital restructuring and not a capital distribution and no income tax is payable during this stage.
Such bonus shares simply increase the total holding in anybody’s hands, but they do not trigger any tax obligation at the time of their issuance. Thus, the cost of acquisition for bonus shares is zero.
"However, the holding period starts from the date the bonus shares are allotted which otherwise means that once the company issues the bonus shares, the date of allotment marks the start of the holding period for tax purposes. Thus, if anybody sells such bonus shares of any listed company within one year of the date of acquisition, any profit out of the same will be taxed under “short term capital gains” and in the event if such bonus shares are being held for more than 12 months, any profit out of such sale will be taxed as “long term capital gains”," Dasgupta said.
Aditya Bhattacharya, Partner, King Stubb & Kasiva, Advocates and Attorneys said the general rule remains that bonus shares are taxed based on the holding period after receipt. "If you sell them within a year, it's short-term capital gains; if held longer, it's long-term," he explained adding that strategic planning of sales becomes crucial due to tax implications.
Bhattacharya said investor may want to hold bonus shares longer to be eligible for long-term capital gains tax and their preference might shift towards dividend-paying stocks for regular income.
Unlisted shares For bonus shares of unlisted companies, the holding period is 24 months, which otherwise means any sale of bonus shares within 2 years or 24 months of their allotment, the profit will be considered as “short term capital gains” and above 2 years will be considered as “long term capital gains.
"However, if there is a sale of original shares and bonus shares happen post issuance of bonus shares then it shall not be treated as short-term capital gains since the holding period shall be calculated from the date of acquisition of the original shares and the date of acquisition of bonus shares and then under such circumstances, such transaction shall result in part long-term and part short-term capital gains as the holding period," Dasgupta said.
Chandwani said the existing rules feel punitive, especially for retail investors who may sell due to market volatility or liquidity needs, not tax planning.
"This approach lacks economic fairness and ignores the reality that bonus shares diluted per-share value without altering the investor’s overall stake. The nil cost rule, coupled with the FIFO method, inflates tax liabilities, as seen in a hypothetical sale of 100 original and 100 bonus RIL shares at Rs 1,500 each, yielding a Rs 35,000 tax bill (Rs 5,000 LTCG + Rs 30,000 STCG)," Chandwani said.
"A more equitable system, akin to cost apportionment in stock splits, would better reflect the investor’s intent and economic position. Until such reform occurs, investors must navigate this trap by timing sales to cross the 12-month threshold for bonus shares or offsetting STCG with losses, highlighting the need for strategic tax planning under an outdated legal provision," Chandwani said.
Bonus shares are new shares issued at the existing face value of the company and, therefore, attract short-term capital gains tax (STCG) at 20 per cent if sold within 12 months of the receipt. This would be the case for long-term investors of Reliance Industries (RIL), who sold their entire RIL stock holding within FY25 following the October 2024 bonus issue of 1:1. Half of the shares sold would attract 20 per cent STCG tax, as investor file income tax returns for the financial year.
"The tax treatment of bonus shares under the Income Tax Act, 1961, particularly section 55(2)(aa)(iii-a), is a stark example of a rigid legal framework that penalises investors for circumstances often beyond their control," said Sonam Chandwani, Managing Partner KS Legal & Associates said.
Chandwani gave an example of an investor, who held 100 RIL shares for five-long years, received 1:1 bonus issue in October 2024 but sold entire holding by March 2025.
Chandwani said the original 100 shares would attract a favorable 10 per cent LTCG tax under section 112A, with a Rs 1 lakh exemption.
"However, the bonus shares, despite being a mere reallocation of corporate profits, are assigned a nil cost and a fresh holding period, resulting in a 20 per cent STCG tax under section 111A on their full sale value. This creates a disproportionate tax burden, as half the proceeds from bonus shares are taxed at double the rate of LTCG, despite the investor’s long-term commitment," she said.
Rajarshi Dasgupta, Executive Director-Tax at AQUILAW said when a company gives out bonus shares, it rewards an existing shareholder without asking for any cash payment. Such a process is considered as a capital restructuring and not a capital distribution and no income tax is payable during this stage.
Such bonus shares simply increase the total holding in anybody’s hands, but they do not trigger any tax obligation at the time of their issuance. Thus, the cost of acquisition for bonus shares is zero.
"However, the holding period starts from the date the bonus shares are allotted which otherwise means that once the company issues the bonus shares, the date of allotment marks the start of the holding period for tax purposes. Thus, if anybody sells such bonus shares of any listed company within one year of the date of acquisition, any profit out of the same will be taxed under “short term capital gains” and in the event if such bonus shares are being held for more than 12 months, any profit out of such sale will be taxed as “long term capital gains”," Dasgupta said.
Aditya Bhattacharya, Partner, King Stubb & Kasiva, Advocates and Attorneys said the general rule remains that bonus shares are taxed based on the holding period after receipt. "If you sell them within a year, it's short-term capital gains; if held longer, it's long-term," he explained adding that strategic planning of sales becomes crucial due to tax implications.
Bhattacharya said investor may want to hold bonus shares longer to be eligible for long-term capital gains tax and their preference might shift towards dividend-paying stocks for regular income.
Unlisted shares For bonus shares of unlisted companies, the holding period is 24 months, which otherwise means any sale of bonus shares within 2 years or 24 months of their allotment, the profit will be considered as “short term capital gains” and above 2 years will be considered as “long term capital gains.
"However, if there is a sale of original shares and bonus shares happen post issuance of bonus shares then it shall not be treated as short-term capital gains since the holding period shall be calculated from the date of acquisition of the original shares and the date of acquisition of bonus shares and then under such circumstances, such transaction shall result in part long-term and part short-term capital gains as the holding period," Dasgupta said.
Chandwani said the existing rules feel punitive, especially for retail investors who may sell due to market volatility or liquidity needs, not tax planning.
"This approach lacks economic fairness and ignores the reality that bonus shares diluted per-share value without altering the investor’s overall stake. The nil cost rule, coupled with the FIFO method, inflates tax liabilities, as seen in a hypothetical sale of 100 original and 100 bonus RIL shares at Rs 1,500 each, yielding a Rs 35,000 tax bill (Rs 5,000 LTCG + Rs 30,000 STCG)," Chandwani said.
"A more equitable system, akin to cost apportionment in stock splits, would better reflect the investor’s intent and economic position. Until such reform occurs, investors must navigate this trap by timing sales to cross the 12-month threshold for bonus shares or offsetting STCG with losses, highlighting the need for strategic tax planning under an outdated legal provision," Chandwani said.