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What Are Bonus Shares and How Do They Work?

Rutuja

Last Updated: 22 Sep 2026, 03:07 PM IST

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What are Bonus Shares
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Bonus shares are the additional shares that are allotted by a firm to its current shareholders without any additional costs. Firms tend to give away bonus shares from the available reserves or profits of the firm rather than paying dividends in cash. In other words, shareholders get more shares according to the shares that they own. Bonus shares are generally issued when a company wants to reward shareholders while retaining cash for future business needs.

For example, in a 1:1 bonus issue, an investor receives 1 additional share for every 1 share already held. If you own 100 shares, you will receive 100 extra shares, increasing your total holding to 200 shares. Understanding what is bonus shares can help investors evaluate how such corporate actions affect their shareholding and long-term investment strategy. 

Key Takeaways

• Bonus shares are extra shares that an organization issues to its shareholders without charging any fees to its shareholders by using the profits of the company instead of issuing money. 

• Under 1:1 bonus share ratio, the investor is entitled to receive 1 bonus share against each of his existing 1 share, thus, making his total number of shares 200 if he holds 100 shares. 

• The corporation declares the bonus ratio as 1:1, 2:1, or 3:2; approval is made by the board of directors, and the record date and ex-date are declared. The new shares are directly deposited into the Demat account of the shareholder at no cost. 

• The share price is adjusted proportionately after a bonus issue, so the overall value of the investment generally remains the same immediately afterwards. A bonus issue does not directly increase the company's market value. 

• Percentage of Bonus Shares = (Bonus Shares Distributed ÷ Shares Already Holding) × 100. In a 1:2 ratio of bonus shares, a person holding 100 shares gets 50 bonus shares and thus the total shareholding becomes 150 shares. 

• The shareholder needs to be in possession of these shares prior to the ex-date, be registered on the record date, and possess the share in an active Demat account. Individual and institutional shareholders become eligible for receiving the bonus, but those who purchase shares post ex-bonus do not get any bonus. 

• The record date is the cut-off day a company fixes to determine which shareholders are eligible. The ex-date is the first trading day after which new buyers are not eligible, and the source says it usually falls one business day before the record date. 

• Fully paid bonus shares are issued without any additional payment, while partly paid bonus shares are issued by converting partly paid shares into fully paid shares using the company's reserves. 

• Companies issue bonus shares to reward existing shareholders, increase investor confidence, improve share liquidity, make shares more affordable after the price adjustment, and distribute accumulated reserves without using cash. Drawbacks include no immediate cash income and a possible reduction in future earnings per share due to the higher share count. 

• Bonus shares are first issued under a temporary ISIN, and moving to a permanent ISIN takes 4-5 business days, after which they are eligible for trading. The source states there is no tax liability when bonus shares are credited to the Demat account, though capital gains tax can apply when they are sold. 

How Do Bonus Shares Work?

Bonus shares work in a simple and structured way:

  • A company announces a bonus issue ratio, such as 1:1, 2:1, or 3:2.
  • The board of directors approves the bonus issue.
  • The company declares the record date and ex-date.
  • Eligible shareholders are identified based on the record date.
  • Additional shares are credited directly to the shareholder's Demat account.
  • The total number of shares held by investors increases.
  • The share price is adjusted proportionately after the bonus issue.
  • The overall value of the investment generally remains the same immediately after the bonus issue.
  • Shareholders do not need to make any payment to receive bonus shares.
     

How To Calculate Bonus Share Percentage?

The bonus share percentage can be calculated using the following formula:

Bonus Share Percentage = (Bonus Shares Issued ÷ Existing Shares Held) × 100

Example
Suppose you hold 100 shares of a company and it announces a 1:2 bonus issue.

  • Existing shares held = 100
  • Bonus ratio = 1 bonus share for every 2 shares held
  • Bonus shares received = 50

Bonus Share Percentage = (50 ÷ 100) × 100 = 50%
This means your shareholding increases by 50%.
After the bonus issue:

  • Existing shares = 100
  • Bonus shares received = 50
  • Total shares held = 150
     

Who is Eligible for Bonus Shares?

A shareholder may be eligible to receive bonus shares if the following conditions are met:

  • The shareholder owns the company's shares before the ex-date.
  • The shareholder's name appears in the company's records on the record date.
  • The shares are held in a valid Demat account.
  • Bonus shares are given to both individual and institutional investors, as long as they qualify for the same. 
  • The individuals who buy shares after the date when the share goes ex-bonus cannot claim bonus shares for that specific stock issuance.
     

Types of Bonus Shares 

The companies can choose to announce bonus shares or not. They can pick from 

1. Fully Paid Bonus Shares

  • These are issued to shareholders without any additional payment.
  • The shares are fully paid at the time of allotment.

2. Partly Paid Bonus Shares

  • These are issued by converting partly paid shares into fully paid shares using the company's reserves.
  • They help simplify the company's share capital structure.
     

Why Do Companies Issue Bonus Shares?

Companies may issue bonus shares for several reasons:

  • To reward existing shareholders.
  • To increase investor confidence.
  • To improve share liquidity in the market.
  • To make shares more affordable after a price adjustment.
  • To distribute accumulated reserves without using cash.
  • To support wider shareholder participation.

What Is the Record Date?

The record date is the cut-off day that a company fixes to determine which shareholders will be eligible for the upcoming bonus share issue. In simple terms: if you’re holding the stock in your demat account on that date, you qualify for the bonus. For example, when you see a company announce a bonus ratio (say 1:2) and mention a record date of 30 June, only the shareholders on the register as of that day will receive the extra shares.

It’s important because share ownership changes frequently - so the record date ensures the company locks in the list of eligible shareholders.

What Is the Ex-Date?

The ex-date (often called the “ex-bonus date” when dealing with bonus shares) is the first trading day after which new buyers of the stock are not eligible for the bonus issue. Usually, this falls one business day before the record date, given the trade settlement cycle.

Here’s the practical rule: if you want to make sure you get the bonus, buy the shares before the ex-date (or on the ex-date if the settlement allows), and hold through the record date. Miss that window and you’re out of luck - even if you buy the share the next day.

Advantages vs Disadvantages of Bonus Shares

Here are the advantages and disadvantages of bonus shares: 

Advantages

Disadvantages

Additional shares are received free of cost.

No immediate cash income is received.

Increases the number of shares held.

The share price adjusts after the bonus issue.

Improves liquidity of the stock.

Total investment value may remain unchanged initially.

Shows confidence in the company's growth prospects.

Future earnings per share may reduce due to a higher share count.

Can support long-term wealth creation if the company grows.

Not all bonus issues lead to higher returns.

Easy and automatic credit to the Demat account.

Investors may wrongly assume bonus shares increase wealth instantly.

Conclusion

To summarise that, what is bonus share, the bonus shares meaning involves distributing extra shares to shareholders, usually from the company's accumulated earnings or reserves. To define bonus shares, they are essentially free shares issued to shareholders, which increases the total number of shares held and reflects the company's intent to reward its investors.

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Frequently Asked Questions

The bonus shares are first issued under a non-permanent or temporary ISIN. Moving from temporary ISIN to permanent ISIN involves 4-5 business days. Once it is converted to a permanent ISIN number, the bonus shares are eligible for trading. 
 

Bonus and stock splits are the sources of increasing liquidity in the company. The bonus shares increase shareholders' holdings in the company, while the stock split makes the stocks more affordable. 
 

Shareholders who own company stock before the record date and ex-date are eligible to receive bonus shares. 
 

A bonus issue does not directly increase the company's market value. It increases the number of outstanding shares while proportionately adjusting the share price. However, bonus issues may improve market participation and investor sentiment.
 

There will be no tax liability for bonus shares that have been issued to you through your Demat account. Nevertheless, there can be capital gains tax if the bonus shares are sold.
 

Bonus shares are issued by companies in order to give back something to the shareholders and increase liquidity among other reasons.
 

Bonus shares are credited automatically to the shareholder's Demat account after the allotment process is completed. No separate application or payment is required from the investor.