- Selling bonus shares can lead to a high tax bill despite low overall economic profit.
- Indian law treats original and bonus shares as separate capital assets with different costs.
- Long-term losses cannot offset short-term gains, potentially creating an unexpected taxable amount.
An investor can make only ₹15,000 overall and still face an indicative Indian tax bill of ₹14,040 after selling old and newly allotted bonus shares together. The result comes from separate acquisition costs, holding periods and loss-setoff rules.
The tax issue usually appears at sale, not allotment. A proportionate issue increases the number of shares without requiring an additional payment, while the market price normally adjusts because the company’s value is spread across more shares.
Indian capital-gains law generally keeps the original and newly allotted shares as separate capital assets. The original holding retains its purchase cost, while ordinary bonus allotments made on or after April 1, 2001 generally carry nil acquisition cost.
Free toolSubstantial Presence Test CalculatorThe timing can split the tax treatment. The old shares may qualify as long-term assets, while the new shares remain short-term assets because their holding period starts on the allotment date.
The example produces a ₹67,500 taxable gain from a ₹15,000 profit
Consider an investor who bought 150 listed shares for ₹1,20,000 on January 10, 2024. The company later made a 1:1 allotment, giving the investor 150 additional shares on April 1, 2025.
The investor sold all 300 shares on August 20, 2025, at ₹450 each. Total sale proceeds were ₹1,35,000, leaving an overall economic profit of ₹15,000.
The tax calculation divides the sale into two parts:
| Holding | Sale proceeds | Acquisition cost | Tax result |
|---|---|---|---|
| 150 original shares | ₹67,500 | ₹1,20,000 | Long-term capital loss of ₹52,500 |
| 150 newly allotted shares | ₹67,500 | Nil | Short-term capital gain of ₹67,500 |
The original shares had been held for more than 12 months. The newly allotted shares had been held from April 1 to August 20, 2025, which is less than 12 months.
Section 70 allows a short-term capital loss to be adjusted against either short-term or long-term gains. A long-term loss, however, can be adjusted only against long-term gains. It cannot reduce the ₹67,500 gain from the newly allotted shares.
The investor therefore has an STCG of ₹67,500 for tax purposes, despite the ₹52,500 long-term loss and the ₹15,000 overall economic profit.
FY 2025-26 sales use the 1961 law
Sales completed between April 1, 2025 and March 31, 2026 fall in FY 2025-26. Investors report those transactions in Assessment Year 2026-27 under the Income-tax Act, 1961.
The Income-tax Act, 2025 came into force from April 1, 2026. It does not retrospectively replace the law governing transactions completed during FY 2025-26.
A proportionate allotment does not ordinarily create immediate tax merely because the additional securities were issued. The issuing company capitalises reserves, and the shareholder’s percentage ownership generally remains unchanged.
Income Tax Appellate Tribunal decisions have recognised that such an allotment is not ordinarily property received without consideration under the gift provisions. Disproportionate, selective or ownership-changing arrangements require separate examination.
The listed-equity rate can add ₹14,040 in the illustration
Where listed equity shares are sold through a recognised stock exchange and the Securities Transaction Tax conditions are satisfied, transfers made on or after July 23, 2024 generally attract a 20% rate under section 111A for the relevant gain.
The example produces this calculation:
| Item | Amount |
|---|---|
| Section 111A gain | ₹67,500 |
| Income tax at 20% | ₹13,500 |
| Health and education cess at 4% | ₹540 |
| Indicative tax | ₹14,040 |
That figure assumes the section 111A and STT conditions apply, no eligible short-term loss is available, the taxpayer has no unused basic exemption limit, no treaty changes the result, no other adjustment applies and surcharge is not applicable.
A resident individual or resident HUF with unused basic exemption may first apply that available amount against the section 111A gain. The remaining gain is then taxed at 20%. The same treatment is not ordinarily available to a non-resident in that manner.
The section 87A rebate is a separate issue. For AY 2026-27, a resident individual under the new tax regime may qualify where the income conditions are met, but the Finance Act, 2025 restricted the enlarged rebate to tax calculated under the normal section 115BAC slab rates. Section 111A gains are excluded from that rebate calculation.
Total income below ₹12 lakh therefore does not automatically remove the 20% tax on listed-equity gains.
A loss survives only if the return preserves it
The ₹52,500 long-term loss in the example may generally be carried forward for eight assessment years. It can then be used against eligible long-term gains, including gains from listed equity shares taxable under section 112A, equity-oriented mutual funds, property, gold, foreign shares and other long-term capital assets, subject to the applicable rules.
The return of loss generally must be filed within the time allowed under section 139(1). A belated return may remove the ordinary carry-forward entitlement.
A broker’s statement does not itself preserve the loss. The investor must enter it correctly in the capital-gains and carry-forward-loss schedules of the income tax return.
FIFO can decide which holding was sold
An investor who sells only part of a dematerialised holding may not freely designate the securities as old or newly allotted. Section 45(2A) generally requires the first-in-first-out method for determining the cost and holding period of dematerialised securities.
Suppose an account contains 100 shares acquired in January 2024 and 100 allotted in June 2025. If the investor sells 100 shares in July 2025 from that account, FIFO would generally identify the January 2024 shares as sold first.
The result can differ sharply from a calculation that treats the recent allotment as the sale. Separate demat accounts can also affect identification, so account-level records should be reviewed instead of relying only on a consolidated portfolio statement.
Bonus-stripping rules can defer an apparent loss
Section 94(8) can apply when securities are acquired within three months before the record date, additional securities are allotted without payment, some or all original securities are sold within nine months after that date, and the investor continues holding some or all of the additional securities.
When those conditions are met, the loss on the original securities can be ignored. Instead, the disallowed amount becomes part of the acquisition cost of the additional securities that remain in the investor’s hands.
The provision is aimed at a transaction in which an investor buys before the record date, receives additional securities, sells the original holding at the reduced post-allotment price and retains the new holding. If the investor sells both the original and all additional securities, the continued-holding condition may not be met, but the dates and quantities still require checking.
Older holdings need a different cost review
The nil-cost treatment is most reliable for ordinary modern allotments. Pre-April 1, 2001 holdings may involve fair-market-value substitution, while specified listed equity assets held on January 31, 2018 may fall under grandfathering rules.
Corporate restructurings, amalgamations, demergers, inherited securities, gifts, earlier allotments and stock splits can also change the calculation. Investors should examine the complete allotment history before assigning nil cost to an older holding.
Non-residents may face withholding before filing
The general classification for Indian listed shares applies to residents and non-residents, subject to specialised provisions and applicable treaties. For non-residents, section 195 withholding may apply to sale income.
Official TDS guidance lists 20% for section 111A short-term gains and 12.5% for section 112A long-term gains above the applicable threshold, before surcharge, cess, treaty claims and the precise withholding mechanism.
The amount withheld may exceed the final Indian liability when the investor has the newly allotted-share gain, a long-term loss on the original holding, other available losses or taxable income in another country. An Indian return may be needed to report the transactions, reconcile TDS and seek a refund.
The investor’s country of tax residence may calculate the allotment and later sale differently. India’s nil-cost and holding-period rules may not match the foreign jurisdiction’s treatment.
Records should cover every allotment and sale
Investors should retain:
- Original contract notes and purchase statements;
- The company’s allotment announcement;
- Record date and allotment date;
- Demat credit statement;
- Sale contract notes;
- Securities Transaction Tax and transaction-charge details;
- Corporate-action statement;
- Broker capital-gains report;
- Demat account-wise FIFO report;
- Previous-year capital-loss schedules; and
- TDS certificates where the investor is non-resident.
Broker reports can contain incorrect acquisition dates, missing grandfathering values, unrecorded corporate actions or transactions assigned to the wrong demat account. Statutory calculations should be checked against the underlying records.
Before selling soon after an allotment, an investor should test whether each holding has crossed the 12-month threshold, whether FIFO identifies the securities being sold, whether section 94(8) applies, whether another short-term loss is available and whether the return can preserve a long-term loss.
Waiting until the newly allotted shares become long-term assets may change the character of the gain and allow an eligible long-term loss to be considered in the same category. It does not necessarily eliminate tax, and market risk may outweigh any possible tax saving.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
