Bonus Shares, Stock Splits, Rights Issues and Buybacks: How Corporate Actions Are Taxed (AY 2026-27)

You bought 100 shares. Two years later your demat shows 200 shares, a line from a demerged company, and a buyback credit you tendered into. When you sell, what did each of those shares actually cost you, and when did you "buy" them?

Corporate actions are where capital gains reporting quietly goes wrong. Broker statements sometimes carry the wrong cost for bonus or demerged shares, and AIS shows only sale value, never cost. This guide covers how each common corporate action is treated for FY 2025-26 (AY 2026-27), with worked numbers.

Quick Reference Table

For listed equity, the rates on eventual sale are the same as for any other share: 20% STCG under Section 111A if held up to 12 months, and 12.5% LTCG under Section 112A above the ₹1.25 lakh annual exemption if held longer. The corporate action only changes the two inputs that matter: cost and holding period.

Bonus Shares: Nil Cost, Fresh Clock

Under Section 55(2)(aa)(iiia), the cost of acquisition of bonus shares is nil. Their holding period starts on the date of allotment, not on the date you bought the original shares. The original shares keep their full purchase cost and their original purchase date.

Example

Priya bought 100 shares at ₹1,200 in March 2023 (total ₹1,20,000). The company issued a 1:1 bonus in August 2024, and the price adjusted to roughly half. In February 2026 she sells all 200 shares at ₹700.

The net ₹20,000 sits inside the ₹1.25 lakh exemption, so no tax is due. Notice that the original lot shows a loss even though Priya made money overall. That is normal and legitimate: the bonus shares carry all the gain, the originals carry all the loss.

Selling Only Part of the Holding

For demat holdings, shares are treated as sold on a first-in, first-out basis. If Priya sells only 100 shares, the original lot goes out first, producing a long-term capital loss of ₹50,000 while she keeps the bonus shares. That loss can be set off against other long-term gains this year or carried forward for eight years, as explained in our guide to set-off and carry forward of losses.

The Bonus Stripping Trap: Section 94(8)

This works only if the original purchase was genuine. Section 94(8), which since AY 2023-24 applies to shares as well as mutual fund units, blocks the loss if all three conditions hold:

1. You bought the shares within 3 months before the bonus record date.
2. You sold those original shares within 9 months after the record date.
3. You still hold the bonus shares when you sell the originals.

In that case the loss on the originals is ignored and is instead treated as the cost of the bonus shares.

Say you buy 1,000 shares at ₹500 in June 2025 ahead of an August 2025 record date for a 1:1 bonus, then sell the original 1,000 at ₹255 in October 2025. The ₹2,45,000 short-term loss is disallowed. It becomes the cost of your 1,000 bonus shares (₹245 each), so you recover it only when you eventually sell those.

A similar rule in Section 94(7) disallows a loss to the extent of dividend received if you buy within 3 months before a record date and sell within 3 months after it.

Bonus Shares and Grandfathering

If the bonus shares were allotted before 1 February 2018, they qualify for grandfathering, so their cost becomes the lower of the 31 January 2018 FMV and the sale price, instead of nil. Bonus shares allotted after that date get no step-up and stay at nil cost. The mechanics of the FMV comparison are covered in our Section 112A grandfathering guide.

Stock Splits and Consolidation

A split changes the face value and the number of shares, but not what you own. It is not a transfer, so there is no tax when it happens. Your total cost stays the same and is spread across the new number of shares, and the holding period runs from your original purchase date.

Example: you bought 50 shares of ₹10 face value at ₹4,000 each (₹2,00,000) in 2022. The company splits each share into five shares of ₹2. You now hold 250 shares at a cost of ₹800 each, still dated 2022.

The common error is in grandfathered holdings. If a split happened after 31 January 2018, the per-share FMV for that date must be divided by the same ratio, otherwise your cost per share is overstated five-fold and your gain is understated.

Rights Issues and Rights Entitlements

A rights issue gives existing shareholders the option to buy new shares, usually at a discount. Since 2020, this option is credited to your demat as a separately tradable rights entitlement (RE). There are three ways it plays out.

You subscribe. The cost of the rights shares is the amount you paid, and their holding period starts on the date of allotment. Your original shares are unaffected. If you hold 100 shares and subscribe to a 1-for-4 rights issue at ₹300, you get 25 new shares with a cost of ₹7,500, dated from allotment.

You renounce (sell the RE). The cost of the entitlement is nil, and since REs are traded for only a few weeks, the gain is always short-term. Selling those 25 entitlements at ₹80 each gives a short-term capital gain of ₹2,000. There is no settled position on whether exchange-traded REs get the 20% Section 111A rate or are taxed at slab rates, so check how your broker reports it and be consistent.

You buy someone else's RE. Your cost is the price paid for the entitlement plus the subscription amount, and the holding period starts from allotment.

If you let the entitlement lapse, there is no gain, no loss and nothing to report.

Mergers and Demergers

When your company merges into another and you receive shares of the amalgamated company, Section 47(vii) makes the exchange tax-free. The new shares inherit the cost and the holding period of the old ones.

A demerger is trickier because one holding becomes two. It is tax-neutral under Section 47(vid), but your original cost must be split between the parent and the resulting company under Section 49(2C) and 49(2D), based on the net book value of the undertaking transferred. Companies publish this ratio after the demerger, usually on their investor relations page.

The best-known recent example is the Reliance Industries demerger of Jio Financial Services in 2023, where Reliance announced that 95.32% of the pre-demerger cost stays with RIL shares and 4.68% moves to JFSL shares. If you had bought 100 RIL shares for ₹2,00,000 in 2021:

Many broker statements show the demerged shares with nil cost or with the listing-day price, and both are wrong. Correct the cost before you file, or you will either overpay or understate your gain.

Share Buybacks: The Rule Changed Twice

Buyback taxation is the most important corporate action to get right for AY 2026-27, because the rules for FY 2025-26 are different from both the year before and the year after.

Buybacks from 1 October 2024 to 31 March 2026

For every buyback in FY 2025-26, the entire amount you receive is treated as a deemed dividend under Section 2(22)(f) and taxed at your slab rate under "Income from Other Sources". No cost is deducted from it, and the only allowable deduction against dividend income is interest on borrowed funds, capped at 20% of the dividend.

At the same time, Section 46A treats the sale consideration for capital gains as nil. So the full cost of the shares you tendered becomes a capital loss, short-term or long-term depending on how long you held them.

The company deducts TDS at 10% under Section 194 if the payment exceeds ₹10,000 in the year, and it shows up in Form 26AS as dividend TDS.

Example

Ramesh, in the 30% slab, tendered 50 shares at ₹1,500 in a November 2025 buyback, receiving ₹75,000. He had bought them in 2022 for ₹55,000.

• Dividend income: ₹75,000, taxed at 30% plus 4% cess = ₹23,400 (₹7,500 already deducted as TDS).
• Long-term capital loss: ₹55,000, reported in Schedule CG with sale value nil.

The loss is valuable only if Ramesh has other long-term gains above the ₹1.25 lakh exemption to absorb it, this year or within the next eight. For a high-slab investor, tendering in a buyback during this window was often worse than simply selling on the exchange at a slightly lower price.

Buybacks from 1 April 2026

The Finance Act 2026 moved buybacks back to capital gains for buybacks on or after 1 April 2026. Ordinary shareholders now compute a normal capital gain (buyback price minus cost), taxed at 12.5% or 20% like any other share sale. Promoters pay an additional tax that brings the effective rate to 30% (22% for promoter companies). That change affects AY 2027-28, not the return you are filing for AY 2026-27.

Reporting in Your ITR

All of these flow into ITR-2 (or ITR-3 if you have business income):

• Bonus, split, rights, merger and demerger shares are reported in Schedule 112A or Schedule CG like any other sale, using the adjusted cost and acquisition date.
• Proceeds from renounced rights entitlements go into Schedule CG as short-term gains.
• Buyback proceeds from FY 2025-26 go into Schedule OS as dividend income, while the matching capital loss goes into Schedule CG with nil sale value.

49Tax reads your broker's capital gains statement lot by lot, so you can check the cost and acquisition date it has picked up against the rules above before your return is generated.

The Takeaway

Before filing, pull your holding statement and list every corporate action that touched a stock you sold during FY 2025-26. For each one, confirm two numbers against your broker statement: the cost per share and the acquisition date. Treat nil-cost demerged shares and any FY 2025-26 buyback as red flags until you have checked them, because those are where the tax difference is largest.