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In India, a cash dividend is normally taxed in the shareholder’s hands as Income from Other Sources in the year it is declared, distributed or paid. An equity bonus issue is generally not taxed when the shares are allotted; tax usually arises later, when those bonus shares are sold and the resulting amount is classified as a capital gain.
The correct result depends on the type of receipt, your residential status, each share lot’s allotment date, the sale date, whether the security is listed and subject to the required STT conditions, and the rules applicable on the transfer date.
Dividend and bonus shares are different tax events
A dividend is a distribution of company profits to shareholders. For dividends declared, distributed or paid on or after 1 April 2020, the Income Tax Department says the amount is taxable in the shareholder’s hands. The department’s published statement is: “Dividend declared, distributed, or paid on or after 01-04-2020 is taxable in the hands of the shareholders.”
A bonus issue gives additional shares to existing shareholders without a separate payment for those shares. The official dividend guidance excludes “bonus shares to equity shareholders” from dividend treatment. Therefore, receiving equity bonus shares is ordinarily not an immediate dividend-tax event. The later sale of those shares is the event that normally produces capital gains.
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How dividend income becomes taxable
Tax head and year of taxation
Ordinary dividend income is reported under Income from Other Sources. Dividend is taxed in the year in which it is declared, paid or distributed, according to the circumstances. An interim dividend is taxed when it is unconditionally made available to the shareholder. The relevant year is therefore determined by when the legal entitlement becomes unconditional or the dividend is paid or distributed, not simply by the financial year in which a company announces its results.
Rate for resident shareholders
A resident individual generally includes dividend income in total income and pays tax at the applicable slab rate. The dividend itself does not automatically receive a separate concessional rate merely because it came from shares. Your total income, chosen tax regime and other applicable provisions determine the effective rate.
Non-resident shareholders
For a non-resident, the domestic rule must be read with any special-rate provision and the applicable Double Taxation Avoidance Agreement. Treaty eligibility, residence documentation and the relevant treaty article can change the result. Do not assume that the resident slab-rate approach applies to a non-resident, and do not assume a treaty rate without checking the treaty and current procedural requirements for the year concerned.
Limited deduction for interest
Interest incurred to earn dividend income is deductible only up to 20% of total dividend income. This limit is stated by the Income Tax Department for 2026. If the interest is higher, the excess cannot be used to reduce ordinary dividend income. Collection commission, banker remuneration and other similar expenses are not deductible against ordinary dividend income.
The 20% ceiling applies to interest connected with earning the dividend; it is not a general deduction for every cost associated with holding or selling shares.
Are bonus shares taxable when received?
Equity shareholders
For an equity shareholder, a normal bonus allotment is excluded from dividend treatment. The allotment itself therefore generally does not create taxable dividend income. You should still retain the company’s corporate-action statement because the allotment date and quantity determine the future capital-gains calculation.
Preference shareholders
The exclusion is not universal. The official dividend guidance lists distribution of bonus shares to preference shareholders among deemed-dividend situations. A preference shareholder must therefore analyse the company’s distribution under the deemed-dividend rules instead of applying the equity-shareholder result automatically.
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When bonus shares are sold, the proceeds are tested under the capital-gains provisions. The bonus lot is treated separately from the original shares, with its own acquisition date and cost rules. Because many post-1 April 2001 bonus lots have a nil cost, a large part of the sale proceeds can become the capital gain, subject to the applicable exemptions, thresholds and rate provisions.
Cost of acquisition for bonus shares
Use the allotment date to select the correct cost rule. The following framework reflects the Income Tax Department’s published capital-gains guidance.
| Bonus-share allotment | General cost rule | Important qualification |
|---|---|---|
| Before 1 April 2001 | Use the fair market value on 1 April 2001 as the cost basis under the official cost table. | Keep evidence supporting the relevant fair-market-value computation. |
| On or after 1 April 2001 | Cost is generally nil. | Check whether a specific grandfathering provision applies before finalising the computation. |
| Qualifying bonus shares allotted on or before 31 January 2018 and sold on or after 1 April 2018 | Special grandfathering mechanics may modify the ordinary basis calculation. | The statutory formula and eligibility conditions must be checked for the particular lot and transfer. |
“Nil cost” does not mean the shares are ignored. It means the acquisition-cost component is generally zero when computing the gain. Sale consideration attributable to that lot is then measured under the capital-gains rules, after applying any specific grandfathering or other statutory adjustment that qualifies.
Holding period: use the bonus lot’s own allotment date
The holding period for a bonus share starts on the date that bonus share is allotted, not on the date you acquired the original shares. The original holding and the bonus holding can therefore fall into different short-term or long-term categories even when they are sold in one broker order.
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For dematerialised holdings, the first-in, first-out (FIFO) method determines which lots are treated as sold. Your broker’s contract note may show one aggregate quantity, but the tax computation must map that quantity to the underlying original and bonus lots using FIFO and the relevant depository records.
Practical lot record
- Corporate-action date on which the bonus shares were credited.
- Number of bonus shares credited.
- Original share quantity and acquisition date.
- Sale date and quantity sold.
- Whether the security was listed and whether the required STT conditions were met.
- Sale proceeds allocated to each lot under the broker and FIFO records.
Capital-gains rates for listed equity transferred on or after 23 July 2024
For specified listed equity securities transferred on or after 23 July 2024, the Income Tax Department’s 2026 guidance reflects the Finance (No. 2) Act, 2024 rates below. These rates apply only when the security and transaction satisfy the stated statutory conditions, including the applicable STT requirements.
| Classification | Rate and threshold | What to verify |
|---|---|---|
| Short-term capital gain | 20% | Confirm that the security falls within the specified listed-equity category and that the required STT conditions are met. |
| Long-term capital gain under Section 112A | 12.5% on the portion exceeding the aggregate ₹1,25,000 threshold | The ₹1,25,000 limit is an aggregate threshold; apply it across the qualifying gains covered by the provision, not separately to every share lot. |
The transfer date controls which rate regime applies. A transfer before 23 July 2024 cannot simply be assigned the post-23 July 2024 rates; use the law applicable to that earlier transfer year. The material summarised here does not provide a complete earlier-rate table, so an earlier sale requires a period-specific check.
How to calculate tax when original and bonus shares are sold together
- Separate receipts. Put cash dividends in the Income from Other Sources computation. Put sale proceeds from shares in the capital-gains computation.
- Split the holdings into lots. Create a line for the original shares and a separate line for every bonus allotment. Record each lot’s quantity, allotment or acquisition date and sale date.
- Assign the cost. Use nil cost for a post-1 April 2001 bonus lot unless a specific grandfathering rule applies. For a pre-1 April 2001 bonus allotment, use fair market value on 1 April 2001 as prescribed. Apply any qualifying 2018 grandfathering mechanics before completing the figure.
- Apply FIFO for demat sales. Match the quantity sold to the earliest available lot, then move to the next lot if the sale exceeds that quantity.
- Classify each matched lot. Measure the holding period from that lot’s own allotment or acquisition date and apply the applicable short-term or long-term test.
- Apply the transfer-date rate. For qualifying listed-equity transfers on or after 23 July 2024, use the 20% short-term rate or the Section 112A long-term framework, including the aggregate ₹1,25,000 threshold where relevant.
- Reconcile records. Compare the calculation with broker statements, corporate-action records, dividend statements and your tax-withholding records before entering the applicable return schedules.
Worked illustration of the lot method
Assume an investor owns an original lot and later receives a bonus lot. The two lots are sold in the same transaction. The original lot keeps its own acquisition date and cost. The bonus lot receives the corporate-action allotment date and, for a post-1 April 2001 allotment without a qualifying exception, nil cost. FIFO determines which quantity is treated as sold first. Each matched lot is then tested independently for short-term or long-term status and for the transfer-date rate.
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Resident status, treaties and documentation
Residential status should be determined for the relevant tax year, not inferred from where the brokerage account is maintained. Residents generally use slab-rate treatment for ordinary dividends, while non-residents may fall under a special domestic rate or a treaty provision. A treaty claim can require proof of residence and other supporting documents, and the treaty may address dividend taxation differently from capital gains.
Keep the following records for the period required by tax law:
- Dividend advice, bank credit entries and company statements.
- Bonus-issue notices showing the allotment date and quantity.
- Demat transaction history and broker contract notes.
- Evidence used for a 1 April 2001 fair-market-value basis, where applicable.
- Documents supporting any 31 January 2018 grandfathering claim.
- Tax-withholding records and the computation used in the return.
Filing and withholding points that need a current check
The dividend, capital-gains, TDS and return-schedule entries must agree. The specific TDS sections and rates, current ITR schedule mechanics, foreign-tax-credit forms and every DTAA are not covered by the rules summarised above. They can change by assessment year and taxpayer status. Before filing, verify the current instructions for the relevant year, especially when you are non-resident, claiming treaty relief, reporting foreign tax or using a grandfathering provision.
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Common mistakes to avoid
- Reporting an equity bonus allotment as ordinary dividend merely because additional shares appeared in the demat account.
- Using the original shares’ acquisition date for the bonus lot.
- Giving post-1 April 2001 bonus shares a purchase price when the general rule is nil cost.
- Ignoring the pre-1 April 2001 fair-market-value rule.
- Applying the 20% short-term or 12.5% long-term rate without checking the 23 July 2024 transfer-date rule and STT conditions.
- Applying the ₹1,25,000 Section 112A threshold separately to every lot instead of considering the aggregate qualifying amount.
- Deducting brokerage-style collection charges or banker remuneration from ordinary dividend income.
- Failing to use FIFO for dematerialised holdings.
- Assuming that a resident’s slab-rate treatment automatically applies to a non-resident.
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