What Is The Difference Between a Bonus And a Stock Split?

Last Updated: 3 Sep 2025

Many investors often get confused when companies announce actions that increase the number of shares in their portfolio. The terms bonus share vs stock split may sound similar in effect, but they work in different ways and have distinct purposes. Knowing how each one operates and impacts your holdings can help you better understand market movements and make wiser investment decisions. In this blog, we will explore the difference between a stock split and a bonus and their influence on your investment strategy.

What is a bonus, and what is a stock split?

Both bonuses and splits entail a small tweaking of your capital base. In case of a bonus, the company issues fresh shares to the existing shareholders by capitalizing the profits held in the free reserves of the company. In case of a stock split, just the par value (fair value) of the stock gets reduced proportionately. Let us look at this with a live case.

Bonus Issue	Details	Stock Split	Details
Share Capital(25 lakh share of Rs10 each)	Rs2.50cr	Share Capital(25 lakh shares of Rs10 each)	Rs2.50cr
Reserves	Rs5.00cr	Reserves	Rs5.00cr
Total Equity	Rs7.50cr	Total Equity	Rs7.50cr
Bonus Ratio	1:1	Stock Split	Rs10 to Rs5

What happens after the bonus and the split?

Rs2.50cr	Share Capital (50 lakh shares of Rs.10 each)	Rs5.00cr	Share Capital (50 lakh shares of Rs5 each)
Reserves	Rs2.50cr	Reserves	Rs5.00cr
Total Equity	Rs7.50cr	Total Equity	Rs7.50cr

Let us look at the company’s capital before and after the bonus issue. The share capital has increased, but the reserves have reduced proportionately. Thus, the net worth of the company remains the same. In the case of a stock split, the share capital and reserves have remained the same. Instead, the number of shares has doubled, and the par value of the stock has halved. Just to cite a story, if Wipro were to handle the growth and value creation without stock splits and bonuses, then each stock of Wipro would be quoting at Rs5cr. Something that will surely make Berkshire Hathaway blush!

Bonus vs Split Difference

Check out the table to understand the difference between bonus and split:

Basis of Difference	Bonus Share	Stock Split
Meaning	Additional shares are given to existing shareholders free of cost, usually from accumulated profits or reserves.	Division of existing shares into smaller units without changing the total value of holdings.
Purpose	To reward shareholders and capitalise on the company’s reserves.	To make shares more affordable and improve market liquidity.
Impact on Share Price	Share price reduces proportionally after the bonus issue due to the increased number of shares.	Share price reduces in proportion to the split ratio, but market capitalisation remains unchanged.
Impact on Face Value	Face value of the share remains the same.	Face value of the share decreases according to the split ratio.
Change in Share Capital	Increases the paid-up share capital of the company.	Paid-up share capital remains the same.
Example	1:1 bonus means one extra share for every one share held.	1:2 split means one share is split into two shares.

Why do companies go for a stock split?

Stock split is a division of the share’s par value. For instance, if the par value of Rs 10 is divided into the par value of Rs 5, then it is a 1:1 stock split. A stock split can be of various proportions. If there is a 1:1 stock split, the share number will be doubled because the par value has decreased by half. Since the company’s earnings are now distributed among double the number of shares, the EPS will be halved, and the price per share will also almost halve. In effect, if you had 1,000 shares at Rs 80, you would have 2,000 shares at Rs 40. The overall effect is neutral.

What could be the trigger for a split?

One such reason is to take the stock within a preferred trading range. For instance, a Rs10 par value stock is available at Rs2,600 in the stock market. If the par value of the stock is reduced from 10 to 2, then there will be 5 times more liquidity on the counter. Simultaneously, the share price will decline to levels of approximately Rs 520, putting it in a more reasonable bracket for the retail segment.

When do companies prefer a bonus issue?

A bonus issue actually involves transferring funds from the reserves to the share capital of the company. Free reserves of the company include general reserves created out of profits and share premium accounts. Effectively, bonus entitlement is for existing shareholders, and a company with large free reserves can look to reward shareholders by transferring funds from the free reserves to share capital.

This is an internal transfer from reserves to share capital, so total equity remains the same. It is a way of rewarding shareholders with stock instead of cash in a way that is value-neutral. Bonuses are normally announced by companies sitting on substantial free reserves.

Three things you need to know about bonuses and splits

• Both a stock split and a bonus issue increase the number of shares outstanding while proportionately reducing the market price. The impact varies based on the bonus or split ratio.
• A 1:1 bonus issue is effectively the same as a 10-for-5 stock split in terms of the net wealth effect for the shareholder, especially when tracked using a stock market app.
• Neither a stock split nor a bonus issue changes the total equity, meaning key metrics like Return on Equity (ROE) and other valuation parameters remain unaffected.

Conclusion

Both bonus shares and stock splits increase the number of shares in an investor’s portfolio, but the way they achieve this and the reasons behind them are different. While a bonus issue rewards shareholders by capitalising on reserves, a stock split makes shares more affordable and improves liquidity. Understanding these differences helps investors make informed decisions, assess the impact on their holdings, and align their strategy with their financial goals.

Frequently Asked Questions

1. Do bonus shares and stock splits increase the value of my investment?

No, both are value-neutral corporate actions. They change the number of shares you hold and the share price, but the overall value of your investment remains the same initially.

2. Which is better for investors – a bonus share or a stock split?

Neither is inherently better; it depends on your investment goals. A bonus may be more attractive if you value additional holdings from reserves, while a split is beneficial if you want more affordable and liquid shares.

3. Are bonus shares taxable in India?

Bonus shares are not taxed when received. However, if you sell them, capital gains tax will apply based on the holding period and selling price.

4. Why do companies prefer stock splits over bonuses sometimes?

Companies opt for stock splits mainly to reduce the market price per share and increase liquidity. This makes the stock more accessible to retail investors and can boost trading volumes.