Bonus Issue

Sometimes companies issue fresh units to the existing shareholders without any consideration in exchange for the same. This practice is called as Bonus Issue. This is done by way of profit appropriation (allocation). A company will distribute profits by way of issuing additional units instead of distributing the company’s profits by way of dividend.

As such, a bonus issue does not have any tax implications on either the company issuing it or on the recipient of bonus units. However, there are investors who smartly utilize a bonus issue as a tax planning tool.


What does “bonus stripping” means?

Just like dividend stripping, even bonus stripping can be termed as a strategy adopted for reducing the tax burden. Under bonus stripping the person purchases stocks prior to the record date and sell off the units after the record date, when the unit price becomes ex-bonus.

As the person is holding the units as on the record date, the person would be eligible for additional units declared by the company, without payment of any additional amount.

One benefit is the short term capital loss for the sale of original units, which is available for set off against any capital gains. The other is the benefit of a concessional rate of tax of 10% of the long term gains made on the same of the bonus units.

Let us understand the concept of Bonus stripping by way of an example

  • Mr.Shiva identified that Company ABC is going to issue bonus units in the ratio of 1:1.
  • Before the record date, he acquires 500 units of the Company. The price of the units on the said date was Rs.1000.Hence, he acquired the units for Rs.5,00,000.
  • On the day of bonus issue, he will receive, 1 bonus unit for every unit held. Hence, Mr Shiva would receive 500 bonus units.
  • Post the bonus issue, the market value of the units declined. Each share is worth Rs 500. He sells the 500 units he purchased for Rs. 500. Thus he makes a loss of Rs.2,50,000.
  • Later, after a year, he sells the bonus units. Since the cost of acquisition of bonus units is Nil, the entire proceeds received from the sale of bonus units would be his long term capital gains.


In this case, Mr Shiva can first set off the short term losses made from original units held, against the long term capital gains made from the sale of bonus units. Subsequently, if the capital gains remaining after set off is greater than Rs 1 lakh, he would be taxed on it at the rate of 10% only.

Tax Implications


Due to bonus stripping, the person can get dual benefit, one he gets additional units without payment of any additional amount, since he is holding the units as on the record date, and secondly since the person sales off the units after the record date at ex-bonus price the loss incurred on sale of such units can be set-off or carried forward, resulting in to the loss of revenue to the Government.

To overcome the said revenue loss, the Government introduced the provisions of section 94 (8) under the income tax.


Sec-94(8) of the Income Tax Act – 1961, deals with the provisions related to the Bonus stripping.

Bonus stripping provides, that the loss, if any, arising to an investor on account of purchase and sale of Original units shall be ignored for the purpose of computing his total income chargeable to tax, subject to the following conditions-

Conditions to be satisfied to attract provisions of Bonus Stripping



Bought or acquired (Original units)

Within a period of 3 months prior to the record date

Allotment of additional units (Bonus units)

Without any payment on such record date

Sold or transferred (Original units)

Within 9 months after the record date

Holds atleast one additional bonus unit

On the date of such sale or transfer of original units

Provisions of sec- 94(8) are applicable only in respect of units and not for shares.

Hence, if the above conditions are met, the loss will be considered to be the cost of acquisition of the bonus units held on the date of sale. (Benefit of indexation is available on such cost of acquisition)


For Example – MB mutual funds declare 1:1 bonus units on its units on 30thApril, 2017. The record date for bonus units issue fixed to be 31st of May, 2017. Mr. A purchases 10,000 units (Original units) of Stanford mutual funds on 15th May, 2017 at a rate of Rs. 50 per unit. Mr. A sells 10,000 original units on 15th December, 2017 at a rate of Rs. 35 per unit.



    Calculation (Amount in Rs.)   


Sales value (10000 x 35)



Cost of acquisition (10000 x 50)



Short term capital Loss (A-B)



No. of bonus units



Consequence:- According to the provisions of sec- 94(8) of IT Act – 1961, The Short term capital loss amount to Rs. 1,50,000/- shall not be considered in computing the total income and such short term capital loss shall neither be set off nor be carried forward.

Hence, the cost of acquisition of 10,000 bonus units shall be taken to be Rs. 1,50,000.



Maitri Badani