Bonus Issue
InvestmentBonus Share Issue
Free additional shares given to existing shareholders in proportion to their current holding, funded from the company's reserves. A bonus issue increases the number of shares outstanding but does not change the company's total value ā the share price adjusts proportionally.
Written by Anurag Rath Ā· Reviewed by the thecalcu.com team Ā· Last updated June 20, 2026
What is Bonus Issue?
A bonus issue (or bonus shares) is the allotment of additional free shares to existing shareholders by a company, funded from its accumulated reserves and surpluses. The ratio of bonus shares to existing holdings is specified by the company, for example, a 1:2 bonus means 1 free share for every 2 shares held.
Bonus shares are funded by converting the company's free reserves (retained profits) into share capital, a bookkeeping entry with no cash leaving the company and no new money entering. The total value of the company remains unchanged immediately after the bonus; the higher share count is offset by a proportionally lower share price.
Bonus issues are seen as a positive signal when a company has strong, consistent earnings and the confidence to permanently capitalise those reserves into share capital.
Formula
New Shares Received = Existing Shares Ć (Bonus Ratio)
Post-Bonus Share Price = Pre-Bonus Price / (1 + Bonus Ratio)
For a 1:2 bonus (1 new share for every 2 held):
- New shares = Existing / 2
- Post-bonus price = Pre-bonus price Ć (2/3)
For a 1:1 bonus (1 new share for every 1 held):
- New shares = Existing
- Post-bonus price = Pre-bonus price / 2
Worked Example
You hold 300 shares of ABC Ltd at ā¹600 each = Total value: ā¹1,80,000
The company announces a 1:2 bonus (1 bonus share for every 2 held).
- Bonus shares received = 300 / 2 = 150 shares
- New total shares = 300 + 150 = 450 shares
- Post-bonus adjusted price = ā¹600 Ć (300/450) = ā¹400
- New total value = 450 Ć ā¹400 = ā¹1,80,000 (unchanged)
6 months later, the stock recovers to ā¹580. Your value = 450 Ć ā¹580 = ā¹2,61,000, growth of ā¹81,000. This growth came from the company's performance, not the bonus issue itself.
Tax note: The 150 bonus shares have zero acquisition cost. If sold after 1 year, all ā¹580 per share is LTCG (taxed at 12.5% above ā¹1.25L threshold).
Key Things to Know
- Bonus ā wealth creation on announcement day: On the ex-date, the NSE/BSE automatically adjusts the price downward. Your pre-bonus wealth and post-bonus wealth are equal. Wealth creation requires the stock to appreciate after the bonus, driven by earnings growth.
- Improved liquidity: After a bonus, the lower per-share price often improves trading liquidity, more retail investors can buy in smaller quantities. This can occasionally lead to modest price discovery improvement, but it's not guaranteed.
- Book value impact: A bonus issue converts reserves to share capital, reserves decrease, share capital increases. Total shareholders' equity is unchanged. Book value per share decreases (same equity, more shares), as does P/E ratio (same earnings, more shares ā lower EPS). Both are arithmetic effects, not economic value changes.
- Zero cost basis for taxation: This is the most important practical implication for investors. When you sell bonus shares (at any price), the entire sale proceeds are your capital gain since the acquisition cost is ā¹0 per IT rules. Long-term gains on bonus shares are particularly tax-efficient when harvested in years where you have less than ā¹1.25 lakh of other equity gains.
- Vs rights issue: A bonus issue costs you nothing and reduces liquidity by using reserves. A rights issue requires you to pay money and brings fresh capital into the company. A company announcing bonus issues is signalling strength (we have surplus reserves to convert); a rights issue may or may not signal the same.