Bonus, split, demerger: what happens to the cost you paid

A holding bought in March 2023 at ₹800 a share received a one-for-one bonus in August 2026. In September, with the stock quoting ₹520, half the position was sold — a sale made in profit, on a stock that has done well, decided in about four seconds. The tax report for the year then shows a long-term capital loss of ₹28,000 on that sale. Nothing has been miscomputed and nothing has been misfiled. The share count doubled and the amount actually paid did not, and every question the tax rules ask about this holding is asked in rupees paid and dates, not in the percentage the app is displaying next to it.

Think of it like this

Buy one, get one free

You buy a mixer for ₹8,000 and the shop gives you a second one free. The bill still says ₹8,000, and it says it against the first mixer — nobody writes ₹4,000 on each. And the guarantee on the free one runs from the day you carried it home, not from the day you bought the first, because that is the day it came into your hands.

In the market

A bonus issue works exactly like that. The original shares keep the whole of the cost you paid, the bonus shares are taken at nil cost, and the holding period on the bonus shares starts on the day they were allotted. Averaging the cost across all of them is the natural instinct and it is the wrong arithmetic.

The two questions to ask of every corporate action

A capital gain is the consideration you receive less the cost of acquisition of what you sold, and whether it is taxed as short-term or long-term depends on how long that particular asset was held. So every corporate action raises exactly two questions, and neither of them is about the price on the screen. Where does the cost go? And where does the clock start? The answers differ from one action to the next, and they differ in ways that look arbitrary until you notice the principle underneath: the tax rules follow what you actually paid and when the asset actually came to you.

The action	What happens to the cost you paid	Where the holding period starts
Stock split or consolidation	Unchanged in total, spread over the new number of shares. A ₹80,000 holding split five ways is still ₹80,000, now at a fifth of the per-share cost	Unchanged. It is the same asset sub-divided, so the original purchase date stands
Bonus issue	Nothing is added, because nothing was paid. The original shares keep their full cost and the bonus shares are taken at nil	The bonus shares run from their own date of allotment. The original shares keep their original date
Rights shares you subscribe to	The amount you actually paid to subscribe, and nothing more	From the allotment of the rights shares, not from when you bought the original holding
A rights entitlement you sell instead of subscribing	Nothing was paid for the entitlement, so its cost is nil and the whole amount received is a gain	The entitlement exists for a matter of days, so the gain on selling it is short-term
Demerger	The original cost is divided between the two companies in the proportion the tax law prescribes — broadly the share of net worth that moved across — and the company publishes the figure	The new company's shares carry the original purchase date. The clock does not restart
A qualifying merger or amalgamation	Not a transfer at all, so nothing is taxable on the exchange, and the cost of the old shares carries to the new ones	The original purchase date carries as well

The pattern is not random. Where you received something without paying for it and without giving anything up — a bonus share, a rights entitlement — the clock starts fresh and the cost is nil. Where an existing holding merely changed shape under a scheme — a split, a demerger, a qualifying merger — the cost and the clock come with it.

Worked example

The sale that showed a loss on a stock that had risen

A listed holding bought in March 2023, bonus in August 2026

The original purchase10 March 2023. That figure is the entire cost of acquisition for this holding and it never changes again100 shares at ₹800 — ₹80,000 paid

One-for-one bonus allotted5 August 2026. The market price adjusts to roughly half. No money moved in either direction200 shares held, still ₹80,000 paid

The stock then rises to ₹520Against ₹80,000 paid — the position is genuinely up about ₹24,000Holding worth ₹1,04,000

100 shares sold on 20 September at ₹520Where two lots sit in one demat account, the tax rules identify the shares sold on a first-in-first-out basis, so these are the March 2023 shares₹52,000 received

The gain on that sale₹52,000 received against the ₹80,000 those shares cost. Held since March 2023, so long-term, and a long-term loss can be set off only against long-term gainsA long-term capital loss of ₹28,000

What is left in the accountWhenever they are sold, the entire consideration is the gain, because their cost is nil100 bonus shares at nil cost, worth ₹52,000

And how those will be taxedTheir clock started on the allotment date, not in March 2023. A holding you have owned for three and a half years can produce a short-term gain on the day it is soldShort-term, if sold before August 2027

Add the two togetherWhich is exactly the economic gain. The total was never wrong−₹28,000 now, +₹52,000 later, ₹24,000 net

Over the life of the holding the arithmetic comes out right to the rupee. What the bonus changed was the timing and the character of it — a deductible long-term loss this year, a matching gain in a later year, taxed at the short-term rate if the bonus shares are sold within twelve months of allotment. Both halves are useful if you know they are there. The ₹28,000 long-term loss can be set against long-term gains booked elsewhere this year, and the bonus shares can simply be held past their own twelve months before they are sold. Neither of those is available to somebody who reads the ₹28,000 as an error and rings the broker about it.

The rule that takes that loss away, in the one case people arrange it

The set-off in that conclusion is available because the shares were bought three years before the bonus. Buy shortly before a bonus record date, sell the original shares shortly after it, and keep the bonus shares, and an anti-avoidance provision removes the loss altogether: it is ignored in computing your income for that year and is instead added to the cost of the bonus shares you kept. The windows are short and prescribed — broadly a purchase within three months before the record date and a sale of the original within nine months after it — and for most of its life the provision reached only mutual fund units, which is why older writing on the subject says confidently that it cannot apply to shares. It was extended to securities generally, so it does. Notice what it does and does not do. It taxes nothing extra and it destroys no cost: the loss moves onto the bonus shares and comes back when those are eventually sold. What it removes is the timing, which was the entire reason for arranging it.

Why the broker's report may not agree with any of this

The profit-and-loss statement your broker generates is a convenience built from the transactions that broker saw. It is not the record the tax law works from, and there are three ordinary situations in which it will be confidently wrong.

It cannot see what it did not do. Shares bought through another broker and transferred in, shares received in a demerger, shares dematerialised from certificates — none of those are purchases the platform witnessed, so it has no cost and no date for them and will often show the transfer date instead.
Its averaging convention is its own. Some platforms display a blended average cost across the original and the bonus shares because that is a sensible way to show a position. It is not how the gain is computed, and the two numbers are answering different questions.
A corporate action is processed by the registrar, not by the broker. The allotment of bonus or rights shares, and the credit of a demerged company's shares, come from the company through the registrar and the depository. Keep the allotment advice and the shareholder circular that sets out a demerger's cost split — they are the evidence, and the company usually publishes the circular on its investor page for exactly this reason.

◆ Recall practice

Cost and clock, quickly

The two questions, for the five actions you will actually meet

Check yourself

Shares bought in 2019 receive a one-for-one bonus allotted in March 2026, and the entire doubled holding is sold in June 2026. How is it taxed?

Simple bhasha mein

Ek lo, ek muft — par bill pehle wale ka hi hai

2023 mein 100 share ₹800 ke liye — kul ₹80,000. 2026 mein 1:1 bonus, ab 200 share, par paisa ek rupaya bhi extra nahi gaya. Yahin log galti karte hain: ₹80,000 ko 200 pe baant kar ₹400 per share maan lete hain. Aisa nahi hota. Purane 100 share ka cost poora ₹80,000 hi rehta hai, aur bonus wale 100 ka cost zero. Ab ₹520 pe 100 share beche = ₹52,000 — FIFO se yeh purane wale gaye, toh ₹80,000 ke saamne ₹28,000 ka long-term LOSS, us stock pe jo chadha hua hai. Aur bache hue 100 bonus share? Unka cost zero hai, matlab jo bhi milega poora gain hai — aur unki ghadi allotment wale din se chalti hai, isliye 12 mahine se pehle beche toh short-term, zyada tax. Kul milakar hisaab sahi hi baithta hai (₹1,04,000 − ₹80,000 = ₹24,000), bas saal aur rate badal jaate hain. Split alag cheez hai — usme cost sach mein baant jaata hai aur purani tareekh bani rehti hai.

What to remember

A corporate action changes the number of shares. It never changes the rupees you actually paid.
A split divides the cost across more shares; a bonus adds shares at nil cost and leaves the original cost where it was.
Bonus and rights shares start a fresh holding period from their allotment; demerged shares and shares received in a qualifying merger carry the original date.
Sell part of a holding and the earliest lot is treated as sold first, which decides both the cost applied and whether the gain is long-term.
A loss booked by selling shares bought just before a bonus, while keeping the bonus shares, is disallowed and added to their cost — the timing goes, the cost does not.
The broker's profit-and-loss statement is built from trades it saw; a bonus, demerger or transfer-in is not one of them.

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