Bonus shares are additional shares issued by a company to its existing shareholders free of charge, in proportion to their existing holdings, by capitalising the company's free reserves or share premium account. A bonus issue does not raise new capital — it simply converts retained profits into equity capital by issuing new shares. For example, a 1:1 bonus means shareholders receive one additional share for every share held, doubling the number of outstanding shares while halving the stock price proportionally on the ex-bonus date. Bonus shares are tax-efficient in India — they are not treated as income at the time of issuance. Capital gains tax applies only when the bonus shares are subsequently sold, with the cost of acquisition considered zero for tax purposes. While bonus issues signal management confidence in the company's financial health and make shares more affordable for retail investors, they do not change the underlying economic value of the business.
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