Bonus Shares vs Stock Split: How They Differ, What Happens to the Price and How Each Is Taxed

Bonus shares vs stock split is one of the most common points of confusion when a company announces a corporate action and the share price suddenly looks cut in half. The price drop feels alarming until you see that the number of shares has gone up by the same proportion.

This guide explains how each action works, what changes on the ex-date, why neither creates real wealth, and how the cost and holding period are treated for tax.

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What Are Bonus Shares?

A bonus issue means a company issues free additional shares to existing shareholders, in a stated ratio, out of its free reserves or securities premium. A 1:1 bonus gives you one new share for every share held. A 2:1 bonus gives you two new shares for every one held.

Because the money comes from reserves already on the balance sheet, the company gets no new cash. Reserves fall and share capital rises by the same amount.

The bonus ratio, such as 1:1 or 2:1, tells you how many free shares you receive for each share you hold.

What Is a Stock Split?

A stock split divides each existing share into several shares by reducing the face value. For example, a split of Rs 10 face value into Rs 2 face value turns one share into five. The company's reserves and total share capital stay unchanged. Only the number of shares and the face value per share change.

Bonus Shares vs Stock Split: Key Differences

Point	Bonus issue	Stock split
What changes	Number of shares increases, reserves convert to share capital	Face value falls and number of shares increases
Source	Free reserves or securities premium	No reserves are used
Share capital	Rises	Stays the same
Face value	Stays the same	Reduces
Price effect	Adjusts down in proportion	Adjusts down in proportion
Market capitalisation	Unchanged at the time	Unchanged at the time

What Happens to the Share Price and Your Holding?

Take a share priced at Rs 1,000 and a 1:1 bonus. After the ex-bonus date, you hold two shares for each one you held, and the price adjusts to about Rs 500. The value of your holding is the same, at about Rs 1,000. A stock split of one share into five works the same way, with a price of about Rs 200 for each of the five shares.

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Exchanges and index providers adjust historical prices for such actions so that charts do not show a false crash. Index constituents such as those in the Nifty 50 are handled the same way.

Record Date and Ex-Bonus Date

The company announces a record date to decide who is entitled. You must hold the shares before the ex-date, which under T+1 settlement falls on the record date. New shares are credited to your demat account some days after the record date, and trading in the adjusted price begins on the ex-date.

How Bonus Shares and Splits Are Taxed

• Bonus shares are not taxed at the time you receive them. Their cost of acquisition is taken as zero, and the holding period starts from the date of allotment. When you sell them, the whole sale value is a capital gain.
• A stock split is not taxed at the time of the split. Your original cost is spread across the larger number of shares, and your holding period carries over from the original purchase.

Tax treatment can change, so confirm the current rules with a tax professional before you sell.

Why Companies Choose a Bonus Issue or a Split

Both actions lower the price per share, which can improve liquidity and bring in more retail participation. A bonus issue also signals confidence in reserves and future earnings, though it does not itself add value. Neither action should be the only reason you buy a share.

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Conclusion

Bonus shares vs stock split comes down to where the new shares come from. A bonus uses reserves and keeps face value, while a split reduces face value and leaves reserves alone. In both, the price falls in proportion to the rise in share count.

Your wealth does not change on the day, so judge the company by its business, and handle the cost and holding period carefully when you sell.

Frequently Asked Questions

What is the main difference between bonus shares and a stock split?

Ans. A bonus issue gives free new shares out of the company's reserves and keeps the face value the same. A stock split reduces the face value and increases the number of shares without using reserves. Both reduce the share price in proportion.

Do bonus shares increase my wealth?

Ans. Not at the moment of issue. The number of shares rises, but the share price adjusts down in proportion, so the value of your holding stays the same. Future gains depend on the company's performance, not on the bonus itself.

What happens to the share price after a stock split?

Ans. The price adjusts down in proportion to the split ratio. If one share splits into five, a price of Rs 1,000 becomes about Rs 200 per share, and you hold five times as many shares. The total value remains unchanged.

How are bonus shares taxed?

Ans. They are not taxed when received. The cost of acquisition is treated as zero, and the holding period begins on the date of allotment. When you sell, the entire sale value counts as a capital gain, taxed as short term or long term.

Is a stock split taxable?

Ans. No, a split is not taxed at the time it happens. Your original purchase cost is spread over the new, larger number of shares, and the holding period continues from the original purchase date.

What is the ex-bonus date?

Ans. It is the first day the share trades without the right to the declared bonus. Under T+1 settlement it falls on the record date, so you must buy before that day to be eligible for the bonus shares.

Which is better for an investor, a bonus issue or a stock split?

Ans. Neither is better by itself, because both leave the value of your holding unchanged at the time of the action. Focus on the company's earnings, growth and valuation instead of the corporate action.