Thread by @Finology_Quest

Everything you need to know about Bonus Issue:

Is it really Free or Taxable 🤔

Let's find out⤵️

#finance #tax #investing

First, let's understand what Bonus Issue is⤵️

These are company’s accumulated earnings which are converted into free shares that are passed on to the current shareholders by the stake held by each of them without charging any additional cost.

Through Bonus Issue, company restructures their Balance Sheet by transferring the profits kept idle in Reserves & Surplus to Capital.

So, this is what company does.

Now, lets look from the perspective of Shareholders:

Will there be any changes in their investment value?

The answer is NO! While bonus shares gets credited to your account & no. of shares held by the investor gets increased, the investment value remains the same

Here's how:

Supppose you hold 100 shares of ABC ltd at Rs 15, total investment becomes Rs 1,500.

Now, the company announced the bonus of 2:1, that means for every 1 share held, you will get 2 free shares. So, the no of holding will rise to 300.

However, the total investment value remains the same becoz bonus share issue will decrease in the price of shares in proportion they are issued.

So, after bonus, the share price will become Rs5 & no of holding will rise to 300, resulting in no change in the investment value.

Now, you might ask, why does the share price fall after bonus issue?

It is because the retained earnings comes down & share capital rises to the extent of bonus share issued. Thus, the price gets adjusted with the same proportion of bonus issue to maintain the same valuation.

Now, let's discuss abt the Tax applicable on Bonus Shares.

The tax rates applied to the sale of bonus shares depend on how long the shareholder has held them. If the bonus shares are sold within one year of being issued, a 15% STCG will be charged.

On the other hand, if the shareholder holds the bonus shares for more than a year and then sells them, they will be required to pay a 10% LTCG on any income earned over ₹1 lakh from the bonus shares.

Here is our detailed Youtube video to help you understand the Tax Implications on Bonus Issue -

Apart from the video, learn how you can analyse different companies from sratch through our Value Investing Course on Quest by Finology - bit.ly/quest-value-in…

Here is how you can access the course⤵️