Income from the stock market is taxed differently depending on its nature, with dividends, bonus shares and buybacks each governed by separate rules under the Income Tax Act. Dividends are treated as taxable income in the hands of investors, while bonus shares and buybacks are subject to different tax treatment at the time of allotment, sale or distribution.
These distinctions affect how investors calculate their tax liability and report such income in their returns. The applicable tax rates, holding period, and tax treatment vary across these categories, making it crucial to correctly classify each type of income when filing the income tax return (ITR).
How are bonus shares taxed in India?
Shares are generally not taxed at the time of allotment. This principle equally applies to bonus shares. However, taxation does arise if you sell those shares, according to tax experts.
“For the purpose of computation, the cost of acquisition of bonus shares is treated as nil, and accordingly, the entire sale consideration is taxed as capital gains,” said Gaurav Makhijani, Managing Partner at MGA.
He explained that any expenditure incurred wholly and exclusively in connection with the transfer of bonus shares may be claimed as a deduction. However, such expenses are typically not significant enough to materially impact the overall tax liability.
As per the rules, the applicable tax rate depends on whether the shares qualify as long-term or short-term capital assets. STCG are taxed at the applicable slab rates, whereas LTCG are taxed at 12.5%, with ₹1.25 lakh exemption on equity. The period of holding is computed from the date of allotment of the bonus shares.
Taxation rules for dividends
For a very long time, India levied a Dividend Distribution Tax (DDT) under which the company declaring dividends was liable to pay tax, and the income was exempt in the hands of shareholders, according to Makhijani. However, the regime was abolished in 2020, and dividends are now fully taxable to investors.
“This change has particularly benefited foreign investors. Under the earlier regime, shareholders were effectively denied tax treaty benefits, as the tax was borne by the distributing company. With dividends now taxed at the shareholder level, treaty benefits are now available. In many cases, treaty rates on dividends are around 10%, compared to an effective tax incidence of approximately 20% under the earlier DDT regime,” he said.
Taxpayers must note that the tax rate on dividends is identical under the law across all investors. However, the effective tax burden differs significantly due to surcharge provisions.
“Investors earning above ₹1 crore annually pay an additional 15% surcharge on their dividend income,” said Adhil Shetty, CEO of BankBazaar, adding that a high net worth individual (HNI) in the 30% slab effectively pays 34.5% tax on dividends (30% + 15% surcharge), while a retail investor in the 15% slab pays only 15%.
“The structural difference isn’t in dividend taxation itself, it’s in the surcharge that applies to higher earners,” Shetty said.
How are buybacks taxed in India?
Buybacks in India are now taxed in the hands of investors following changes introduced in the Budget 2026. Earlier, companies paid a buyback tax, and investors received the proceeds tax-free. Under the revised framework, gains from buybacks are treated as capital gains.
For listed shares, gains are taxed as short-term capital gains at a flat rate of 20% if held for 12 months or less, or as long-term capital gains at 12.5% if held for more than 12 months.
For unlisted shares, gains are classified as long-term if held for more than 24 months and taxed at a flat rate of 12.5%, while short-term gains are taxed at the investor’s applicable tax slab rate, said Vinayak Magotra, Product Head and founding team at Centricity WealthTech. “In both cases, tax is only paid on the gains (buyback price minus purchase cost) rather than the total amount received,” Magotra noted.
For promoter shareholders, however, tax rates differ: both long- and short-term gains are taxed at 22% for domestic companies and 30% for other promoters, said Makhijani.
How to report dividend, bonus and buyback income in ITR?
Since dividends are now tracked in the Annual Information Statement (AIS), they should be reported under “Income from Other Sources” (Schedule 128 of ITR Form), with the exact dividend amount and company name, according to Shetty.
Meanwhile, bonus shares require no income reporting at the time of allotment. However, when an individual sells the assets later, the entire proceeds must be reported as capital gain under the relevant schedule, with the acquisition date treated as the bonus allotment date, he explained.
Buyback proceeds should be reported as capital gains, with the difference between buyback price and original purchase cost clearly stated. If tax collected at source (TCS) was deducted, then it must be shown as tax paid. “The critical point is consistency: ensure your ITR figures match the AIS data your bank and brokerage report to the Income-tax Department,” he said.
