A bonus issue is a stock dividend distributed by a corporation to its shareholders as a way of rewarding them. The bonus shares are issued from the company’s reserves. These are free shares that shareholders receive in exchange for shares they already own. These allotments are usually in predetermined ratios, such as 1:1, 2:1, 3:1, and so on.
If the ratio is 2:1, existing shareholders will receive two additional shares for every one they already own at no cost. So, if a shareholder owns 100 shares, he will receive an extra 200 shares, bringing his total holding to 300. The number of shares held by a shareholder will increase when bonus shares are given, but the investment’s overall value will remain same.
As an example, consider a bonus issue with different ratios – 1:1, 3:1, and 5:1.
Similar to the dividend issue, there is a bonus announcement date, ex-bonus date, and record date.
Bonus shares are issued by companies to stimulate retail involvement, particularly when the company’s price per share is extremely high and it becomes difficult for new investors to purchase shares. The number of outstanding shares grows when bonus shares are issued, but the value of each share decreases, as demonstrated in the example above. The face value is unaffected.
On which shares dividend is paid?
A stock dividend is a dividend that is paid to shareholders in the form of stock rather than cash. Although it might reduce earnings per share, the stock dividend has the advantage of rewarding shareholders without lowering the company’s cash balance.
These stock distributions are usually paid out in fractions of existing shares. For example, if a firm declares a 5% stock dividend, it must issue 0.05 shares for every 100 shares held by existing shareholders, resulting in the owner of 100 shares receiving five more shares.
Is dividend/distribution tax payable on bonus shares?
Bonus Share helps you save money on taxes. Companies must pay dividend distribution tax on cash distributions, resulting in a lower return for investors. There is no dividend distribution tax in the case of bonus shares.
What is better bonus or dividend?
Dividends are important to all investors. It is the portion of a company’s earnings that is distributed to its shareholders. Dividends are the financial rewards that an investor receives for investing in a company. The corporation decides on a proportion of dividends at the conclusion of the term, which are subsequently distributed to the holders. For example, if a share has a face value of Rs. 100 and the dividends declared are 10%, the investor will receive Rs. 10 for each share owned.
Even though the company has made a profit, it is never compelled to pay dividends. It is completely up to the Board of Directors’ judgment.
Tax Implications
Every business is subject to a variety of taxes. So, you are correct in assuming that the corporation pays tax on dividends and bonuses. Let’s have a look at how it works.
Bonus shares: A company’s reserves or accumulated profits from the current or prior years can be used to issue bonus shares. It’s done to boost the stock’s capital and marketability. The issuance of bonus shares reduces earnings per share, lowering the market price of the stock.
The issuing of bonus shares does not require a corporation to pay tax. However, if the shareholder intends to sell or buy bonus shares, he or she will be subject to tax. According to the Income Tax Law of India, all income derived from securities is taxed under the heading Capital Gains. There are two sorts of capital gains: short-term and long-term. When bonus shares are held for less than or equal to 12 months, a short term capital gain occurs, and the associated tax rate is 15%. When an investor holds shares for more than 12 months, he or she has made a long-term capital gain, which is exempt from taxation under section 10 of the act.
Dividends: A firm must pay dividend distribution tax if it wishes to pay dividends to its shareholders. The dividend distribution tax, or DDT, is a tax paid on a company’s earnings. The corporation is currently subject to a DDT tax of 15%. According to the Indian government’s guidelines, if a firm chooses to pay dividends to existing shareholders, it must transfer 15% of the dividend’s gross value. It is also subject to a surcharge and cess on top of the 15% rate, bringing the total percentage to be paid as DDT to 17.65%. This tax must be deposited within 14 days of the announcement, and if it is not, the corporation will be charged interest at the rate of 1% of the tax.
For example, if a corporation makes a profit of Rs. 1000, it must pay 30% in income tax.
So, if profit is Rs. 1,000 and Incone Tax is Rs. 300 (30%), the residual earnings are Rs. 700.
If the corporation decides to give 400 rupees as dividends, the remaining 300 rupees will be put into reserves.
The gross dividend distribution tax, which would be levied at Rs. 400, will be 15%. As a result, the tax will be Rs. 60.
This value of Rs. 340 is divided by the total number of shares in the corporation to arrive at the dividends paid per share.
Since the tax ramifications for the corporation are now evident, let’s look at it from the investor’s perspective. Dividend income is tax-free up to a specified level in the hands of an investor. If the investors earn total dividends in excess of Rs. 10 lakhs, the total dividend income is subject to a 10% tax. Only dividends paid by local or Indian corporations are tax-free, however dividends paid to Indian investors by international companies are taxed. If the investor has already paid the tax in the nation of origin, he or she may be eligible for a refund.
Bonus shares are clearly preferred by firms over dividends since they have very few difficulties and tax implications. Similarly, issuing bonus shares is considerably better for investors. The following are the primary points of distinction that make bonus shares the preferred option:
- The first and most important criterion is to save money on taxes. On the issuing of dividends, a firm must pay dividend distribution tax, although bonuses are not subject to this tax because they are treated as a fresh share issue. Even for investors, bonus shares are only subject to short-term capital gains tax if sold within a year. All of this points to bonus shares being the better option of the two.
- A corporation is not required to pay dividends to its stockholders. According to the Companies Act of 2013, a company is only compelled to pay dividends if it has large earnings at the end of the year, and even then, only at the discretion of the Board of Directors. Even if a corporation has lost money, it can still award bonus shares. This is because bonus shares can be issued using current profits and accumulated reserves from previous years. Even if there are no gains in the present term, the stockholders will be satisfied.
Do bonus shares have to be issued to all shareholders?
When corporations are short on cash and shareholders demand a regular income, bonus issues are issued to shareholders. The bonus shares can be sold by shareholders to suit their liquidity needs. Bonus shares may also be issued to help the corporation restructure its reserves. There is no cash flow involved in issuing bonus shares. The company’s share capital is increased, but not its net assets.
Bonus shares are distributed in proportion to each shareholder’s ownership position in the business. Bonus issues do not erode shareholders’ equity since they are distributed in a constant ratio to existing shareholders, preserving each shareholder’s relative equity before the issue. A three-for-two bonus issue, for example, entitles each shareholder to three shares for every two shares held before to the issuance. A 1,000-share shareholder receives 1,500 bonus shares (1000 x 3 / 2 = 1500).
Bonus shares are not taxable in and of themselves. However, if the stockholder sells it for a profit, they may have to pay capital gains tax.
A bonus issue is essentially a reclassification of reserves for internal accounting purposes, with no net change in overall equity, though its composition is altered. A bonus issue is a company’s share capital increase combined with a reduction in other reserves.
Can bonus shares be issued to partly paid up shares?
No, a corporation can only issue Bonus Shares to members/shareholders whose names appear in the Register of Members on the record date: Q. 4 Can a corporation issue Bonus Shares that are only partially paid up? Ans.
Is dividend paid monthly or yearly?
The cash that a corporation distributes to its shareholders as a result of its profit earnings is known as a dividend. Without paying dividends, the corporation may chose to reinvest its profits in the business. Dividends are determined by the company’s board of directors and must be approved by shareholders. Dividends are paid out every three months or once a year.
Record date and Ex date:
A financially sound corporation pays out dividends on a regular basis. You should also be familiar with the phrases record date and ex date. The shareholders who own shares in the corporation on the record date are eligible for dividend distribution. The record date is normally one day before the ex dividend date. You will not receive a dividend if you buy a stock on or after the ex date.
Dividend payout ratio:
It is the percentage of net income paid to shareholders as dividends. It is not a good idea to invest in a company with a dividend payment ratio of more than 100% because the business will eventually become unsustainable.
Do we have to pay for bonus shares?
The shareholders’ investment provides the equity capital for a public limited corporation. As a result, shareholders anticipate a profit on their investment. The corporation can do the same by paying cash dividends or issuing bonus stock. Bonus shares are accumulated profits that a firm distributes as free shares to current owners. There are no additional expenditures, and the shares are distributed based on the present shareholder holdings.
Cash dividends are real-world transactions with a monetary payout. Bonus shares, on the other hand, have no payment and are simply a book item where Reserves are capitalized.
Is dividend taxable in 2021?
The entire amount of dividend income is taxable in the hands of shareholders in 2021-22, and the Rs. 10 lakhs threshold limit set out in section 115BBDA has no impact.
Do you pay tax on bonus shares?
In most cases, a gift of stock in appreciation of an employee’s performance or lengthy service will be taxable as employment income in the employee’s hands. Because most private company shares have no market value, the employee will have to record this income as self-assessment rather than PAYE. However, no national insurance contributions should be made on the gift.
The value of the shares will determine the income tax liability. A minority stake in a private firm is frequently highly discounted, and not just a percentage of the company’s value. HMRC will need to approve the amount.
The company’s accountants may be able to perform this, or an expert valuer may be required. If there are limits on the shares, the restricted securities regime will need to be considered. It is possible to choose not to participate in this program.
The corporation can pay any tax burden on behalf of the employee; nevertheless, the amount of tax will result in PAYE and NIC duties.
Who is eligible for bonus shares?
Bonus shares are additional shares granted to current owners by a firm as a “BONUS” when the company is unable to pay a dividend to its shareholders while making a profit for the quarter.
Only a corporation that has made a substantial profit or has large free reserves that cannot be used for any specific purpose and can be dispersed as dividends has the ability to issue bonus shares to its owners.
These bonus shares, on the other hand, are distributed to shareholders in proportion to their current holding in the company.
If a corporation declares one-for-two bonus shares, an existing shareholder will get two more shares in exchange for one existing share.
Assume a shareholder owns 2,000 shares in the business. He will receive 1000 bonus shares when the firm releases bonus shares, i.e. (2000 * 1/2 = 1,000).
The terms “record date” and “ex-date” are used when the corporation issues bonus shares to its shareholders. Let’s have a look at what the terms “record date” and “ex-date” mean:
The record date is the cut-off date set by the corporation for bonus shares eligibility. The corporation will issue bonus shares to all shareholders who have shares in their Demat account on the record date.
The record date is one day earlier than the ex-date. To be eligible for bonus shares, an investor must purchase the shares at least one day before the ex-date.
Does share prices fall after bonus issue?
When bonus shares are issued, the number of outstanding shares in the market increases but the value of each share declines according to the bonus issue ratio. However, if additional demand is generated, the share price can rise above the pre-bonus price.
