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. According to reports from Mint, 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, with the applicable tax rates, holding period, and tax treatment varying across these categories.
Shares are generally not taxed at the time of allotment, and this principle equally applies to bonus shares. As reported by Mint, 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. Tax experts explain that any expenditure incurred wholly and exclusively in connection with the transfer of bonus shares may be claimed as a deduction, though such expenses are typically not significant enough to materially impact the overall tax liability. The applicable tax rate depends on whether the shares qualify as long-term or short-term capital assets, with STCG taxed at applicable slab rates and LTCG at 12.5%, with ₹1.25 lakh exemption on equity.
India previously levied a Dividend Distribution Tax (DDT) under which companies were liable to pay tax, and shareholders received exempt income. However, as reported by Mint, this regime was abolished in 2020, and dividends are now fully taxable to investors. According to tax experts, this change particularly benefits foreign investors, as under the earlier regime, shareholders were effectively denied tax treaty benefits, with treaty rates on dividends around 10% compared to an effective tax incidence of approximately 20% under the earlier DDT regime. The tax rate on dividends is identical across all investors, but the effective tax burden differs significantly due to surcharge provisions, with investors earning above ₹1 crore annually paying an additional 15% surcharge.
Buybacks in India are now taxed in the hands of investors following changes introduced in Budget 2026, as reported by Mint. Earlier, companies paid a buyback tax, and investors received proceeds tax-free. Under the revised framework, gains from buybacks are treated as capital gains, with listed shares taxed as short-term capital gains at 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 12.5%, while short-term gains are taxed at the investor's applicable tax slab rate. Promoter shareholders face different rates: both long- and short-term gains are taxed at 22% for domestic companies and 30% for other promoters.
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 Mint. Bonus shares require no income reporting at the time of allotment, but when sold, the entire proceeds must be reported as capital gain under relevant schedules, with the acquisition date treated as the bonus allotment date. Buyback proceeds should be reported as capital gains, with the difference between buyback price and original purchase cost clearly stated, and any tax collected at source (TCS) must be shown as tax paid. As noted by experts, consistency is critical to ensure ITR figures match the AIS data reported by banks and brokerages to the Income-tax Department.
