What are Bonus Shares?

Last Updated: 11 Aug 2025

As a new-age investor, it is vital to be aware of the fundamentals of the stock market before starting your investment journey. Along with being well-versed in the market dynamics, you must know about the key concepts of the stock markets. One such crucial aspect is knowing about corporate actions, which are the decisions taken by the companies listed on the stock exchange. These can be issuing dividend rights, split stocks and bonus shares.

In this blog, you will learn about the corporate action known as Bonus Shares.

What is a Bonus Share?

A bonus share is a free additional share given to the shareholders as a bonus. The shares are given at no additional cost based on the number of shares the investors already hold. Bonus shares are always announced in a specific ratio and results in decreasing the share price of the company with the same ratio value.

Benefits of Bonus Share

Bonus shares are additional shares issued to existing shareholders without any additional cost, based on the number of shares a shareholder already owns. These shares are issued out of the company’s free reserves or retained earnings. So, what is bonus issue, and why do companies go for it? A bonus issue helps capitalize a portion of the company’s profits while rewarding shareholders and increasing share liquidity.

Let’s move on to discussing ‘what is the benefit of bonus shares?’ One of the biggest advantages is that shareholders get more shares without paying anything, thereby increasing their total holding. This often boosts investor confidence and market sentiment. It also reflects positively on the company’s fundamentals, indicating it has sufficient reserves.

In the context of what is bonus in share market, it is important to note that bonus shares do not increase your total investment value immediately, but they enhance your potential for future gains, especially in a growing company.

The Benefits of Issuing Bonus Shares

• Increases shareholder wealth without cash outflow.
• Enhances retail participation by reducing the share price.
• Signals strong financial health and investor confidence.
• Improves the liquidity of shares in the market.
• Helps align the number of shares with the company’s capital structure.
• A non-cash way to reward shareholders.

Implications of Bonus Issue

• The bonus share issue is a corporate action to revamp the existing cash reserve of a company. It brings the employed capital of the company in sync with the issued capital. If a company makes a profit, it increases its employed capital. This surplus is distributed by increasing issued shares, also known as issued capital.
• A bonus share issue does not impact a company’s net assets as the action does not involve any cash flow. It simply means that the number of shares issued by the company – called share capital – has increased.
• Bonus share issue impacts the Earnings per Share (EPS), calculated by dividing a company’s net profit by the number of owned shares. However, a decrease in EPS is compensated in the long term by a corresponding increase in the number of owned shares.

How Bonus Shares Work

To understand how bonus shares work, one must know what are bonus shares and the mechanics behind them. A company announces a bonus share ratio like 1:2, which means for every two shares owned, the investor will receive one additional share. Other common ratios include 2:5, 3:1, etc. These shares are called fully paid bonus shares, meaning shareholders don’t need to invest additional money.

The record date is the cut-off date to determine who is eligible to receive bonus shares. Investors holding the shares by this date will receive the bonus. The ex-bonus date is typically a day or two before the record date; buying the stock on or after the ex-bonus date will not entitle you to receive bonus shares.

Let’s say you own 100 shares and the company declares a 1:1 bonus. You will get 100 additional bonus shares, doubling your holdings to 200, without spending anything. However, the price of each share will be adjusted to reflect the increased number of shares in circulation.

Eligibility for Bonus Issue

• After announcing a bonus issue, a company simultaneously announces the date of the issuance of bonus shares, known as the record date. All existing shareholders on the record date are eligible to receive bonus shares.
• You must also know about the terms ‘Cum-Bonus’ and ‘Ex-Bonus’ regarding the bonus shares issued. The eligible bonus shares between the date of announcement of the bonus issue and the record date are known as ‘Cum-Bonus’, while the status of bonus shares post-issuance on the record date is known as ‘Ex-Issue.’

Difference Between Bonus Shares and Stock Split

While both bonus shares and stock splits result in an increased number of outstanding shares, they differ significantly in terms of mechanics and purpose. Here’s a comparison to clarify:

Feature	Bonus Shares	Stock Split
Definition	Free shares issued to existing shareholders	Division of existing shares into smaller units
Purpose	Reward shareholders using the company’s reserves	Increase share liquidity by reducing the face value
Capital Reserve Impact	Reduces reserves	No impact on reserves
Face Value	Remains the same	Reduced post-split
Tax Implication	Not taxed at receipt; taxable only when sold	No tax implications at the time of the split
Example	1:1 Bonus – 100 shares become 200	1:2 Split – One ₹10 share becomes two ₹5 shares

So, while what is bonus in share market refers to issuing extra shares using company profits, a stock split merely divides the existing shares to make them more affordable without using any reserves.

Impact of Bonus Shares on Share Price and Market Cap

Issuing bonus shares affects a stock’s price but not the company’s overall valuation. The total market capitalization of the company remains unchanged, as the increase in the number of shares is offset by a proportional decrease in the share price.

Impact on Share Price

• The share price is adjusted downward based on the bonus share ratio.
• For a 1:1 bonus issue, the price typically halves.
• This attracts new investors due to a more affordable price point.

Impact on Market Cap

• No real change in market capitalization.
• The overall value held by each shareholder remains the same post-adjustment.
• Reflects a more robust shareholding structure.

Example

If the stock was trading at ₹1,000 and a 1:1 bonus issue of shares is declared, the new price would be approximately ₹500, but shareholders would now hold double the shares.

Hence, what is the benefit of bonus shares for a company? It’s a smart strategy to reward shareholders, enhance liquidity, and signal confidence – all without altering core valuations.

Bonus Issue and Taxation

According to the relevant provisions of the Income Tax Act, 1961, there are no tax implications on a bonus issue for shareholders in a particular financial year. This means that you don’t have to pay taxes for receiving the bonus shares. However, the gains made by trading in the additional shares are categorised as capital gains and taxed accordingly.

Bonus Issue – Guidelines to be Followed by Companies

Before a bonus issue, the company has to follow the guidelines listed below:

• The company’s Articles of Association (AoA) must have a provision for the issue of bonus shares.
• The management must pass the resolution for bonus shares issued in the company’s annual general meeting. It must be recommended by the board of directors and then sanctioned by the shareholders.
• The stock exchange should be informed about the impending bonus shares issue.
• If the bonus issue is being made to Non-resident Indians (NRIs), permission is required from the Reserve Bank of India (RBI).

Conclusion

A company can issue bonus shares to its shareholders to distribute its accumulated earnings. Not only do bonus issues strengthen a company’s equity base, but they also increase retail participation in its shares. As an investor, you stand to gain if the company announces a bonus issue. Before starting to invest in company shares, you must mandatorily have a Demat Account. Opening a Demat Account with a trusted financial partner like IIFL Capital Services Limited can provide access to a slew of benefits, like free AMC charges, seamless trading platforms and consolidated market research reports.