Bonus, Split, Rights: Corporate Actions Without Tax Surprises

Your HDFC Bank holding did a 1:1 bonus. You now own 2x the shares. Nothing taxable happened. But your cost basis per share halved. Ignore this at sale time and your capital gain is wildly understated. The IT department catches it via the depository's AIS feed. Bonus, split, and rights are the three most common corporate actions; each gets a distinct cost-basis treatment that stays with the shares for their entire holding life, and FIFO at sale brings it all back at the worst possible moment.

By the end, you will know the cost-basis treatment for bonus, split, and rights issues. The FIFO rule that decides which lot you are deemed to sell. And the anti-bonus-stripping section 94(8) that punishes cute pre-bonus trades.

Three corporate actions, three cost-basis rules

BONUS. Free additional shares. No tax event on receipt. Cost basis of ORIGINAL shares spreads across total (original + bonus) to derive new per-share cost. Bonus shares have ZERO acquisition cost but inherit the ORIGINAL date for holding-period calculation.
STOCK SPLIT. 1 share becomes N. No tax event. Cost basis per share divides by N. Holding period continues from original purchase date.
RIGHTS. You pay a discounted subscription to get additional shares. Cost basis of new shares = actual subscription price. No tax event on grant; tax event only on eventual sale.

The bonus rule is the trickiest. Budget 2018 amended section 55(2)(aa) to specify that bonus shares issued before 1 April 2001 use the fair market value on 1 April 2001 as cost. Post-2001 bonus shares: Rs. 0 cost. But they inherit the ORIGINAL shares' holding-period clock. So a pre-2024 bought share plus a 2024 bonus share both count long-term if sold in 2026. This is why long-term equity investors get a compounding benefit from corporate actions: more shares at lower aggregate cost, all long-term.

FIFO at sale. Which lot goes first

When you sell partially, India tax law uses FIFO (first-in, first-out) to determine which lot is sold. Bought HDFC Bank in 2019, got bonus in 2022, sell 50% in 2025 to FIFO assumes 2019 lot goes first (long-term). The 2022 bonus lot stays; a subsequent sale would dip into it. This matters for holding-period determination AND cost basis: the 2019 lot had a higher per-share cost than the adjusted post-bonus basis; selling the higher-cost lot first reduces the capital gain.

Brokers like Zerodha and Upstox apply FIFO automatically in their Tax P&L reports. Check a 3-year statement to see the lot-level cost history. Demergers (which spin off a new entity as a free distribution) follow a separate cost-allocation rule based on the net asset value split notified by the company. Different from bonus.

Section 94(8). The anti-bonus-stripping rule

What if you bought shares just before a bonus, waited for the bonus, then sold the original lot at the ex-bonus (lower) price to book a short-term loss, keeping the free bonus shares? Section 94(8) disallows this. If you buy within 3 months BEFORE a bonus and sell within 9 months AFTER the bonus, the capital loss on the original shares is disallowed. It instead adds to the cost basis of the bonus shares. Neat anti-abuse rule, narrow but firm. Regular long-term investors who hold through bonuses are unaffected.

Rights unexercised has no tax event

If you let a rights entitlement lapse (do not subscribe and let the right expire), there is no capital loss, no cost adjustment, nothing. The original holding continues at its original cost. Some companies allow selling the rights-entitlement on exchange. That sale is a capital event (short-term gain at slab if right itself is < 36 months).

Rights unexercised has no tax event

Lapsed rights: no capital loss, no cost adjustment. Original holding continues unchanged. Selling the rights entitlement itself (if exchange allows) is a capital gain event, separate from the underlying share.

Bonus stripping. Section 94(8) anti-abuse

Buy within 3 months before bonus + sell within 9 months after: short-term loss on original shares is disallowed and added to bonus cost basis. This neutralises manufactured bonus-strip trades. Genuine long-term holds unaffected.

Demergers. Cost allocation by notified NAV split

When a company demerges (HDFC Ltd to HDFC Bank merger was one), the original cost of the parent's shares is split between the parent and the resulting entity based on the net asset value ratio notified by CBDT. Zerodha / depository updates the cost automatically; verify in the contract summary.

Key Takeaways

Bonus / split: no tax on receipt; adjust cost basis per share.
Rights: cost basis = subscription price; holding starts from subscription date; taxable on sale.
FIFO decides which lot is sold; check holding-period boundary.
Bonus stripping (3m before / 9m after): section 94(8) disallows short-term loss, adds to bonus cost.
Lapsed rights: no tax event; sold rights entitlement: separate capital event.