Cost Basis After Stock Split, Bonus Issue & Corporate Actions: FIFO Guide

Why Corporate Actions Complicate Cost Basis

You buy 100 shares of a company at Rs 1,000 each. Simple enough. Then the company announces a 1:1 bonus issue. Now you have 200 shares. What is your cost basis? What about FIFO ordering? When does the holding period start for the bonus shares?

Corporate actions, including stock splits, bonus issues, rights issues, and buybacks, alter the number of shares you hold and potentially the cost per share. If not handled correctly, these changes can lead to significant errors in capital gains computation.

The challenge is that brokers handle corporate actions in their systems automatically, adjusting quantities and average prices. But they may not always communicate how the adjustment affects your FIFO lot structure. And when it comes to filing your tax return, the responsibility to compute the correct cost basis lies with you.

This article covers the four most common corporate actions and their precise impact on cost basis, FIFO lot ordering, and holding period. Each section includes worked examples so you can apply the rules to your own portfolio.

Understanding these rules is particularly important for investors holding blue-chip stocks that frequently undertake corporate actions, companies like Reliance Industries, TCS, and Infosys that have had multiple splits and bonus issues over the years.

Stock Split: Cost Per Share Adjusts, Total Cost Unchanged

Bonus Issue: Cost of Bonus Shares Is Zero

Bonus Shares: Holding Period Starts from Allotment

A frequently misunderstood rule is the holding period for bonus shares. Many investors assume that bonus shares inherit the holding period of the original shares from which they were derived. This is incorrect.

The holding period for bonus shares starts from the date of allotment of the bonus shares, not from the date the original shares were purchased. This has significant implications for the short-term vs long-term classification.

Example: You bought 100 shares of HDFC Bank on 1 January 2024. A 1:1 bonus is allotted on 1 September 2024. You now hold 200 shares:

• 100 original shares: holding period from 1 January 2024
• 100 bonus shares: holding period from 1 September 2024

On 1 March 2025, you sell 150 shares. Under FIFO: - First 100 shares are the originals (bought 1 Jan 2024). Holding period: 14 months. Long-term. Cost: Rs 1,500. - Next 50 shares are from the bonus lot (allotted 1 Sep 2024). Holding period: 6 months. Short-term. Cost: Rs 0.

The 50 bonus shares are short-term even though the original shares are long-term. And since the cost is Rs 0, the entire sale price of the bonus shares becomes STCG, taxed at 20%.

This can result in a surprisingly large tax bill. If the sale price is Rs 1,800, the STCG on 50 bonus shares is 50 x Rs 1,800 = Rs 90,000. Tax at 20% = Rs 18,000. Many investors are caught off guard by this.

To avoid unexpected STCG on bonus shares, wait until the bonus shares have been held for more than 12 months from the allotment date before selling them.

Rights Issue: Add the Rights Price to Cost Basis

A rights issue is when a company offers existing shareholders the right to buy additional shares at a specified price, usually at a discount to the market price. Unlike bonus shares, rights shares are not free; you pay the rights price.

The cost of acquisition for rights shares is the price you paid to acquire them. This is straightforward. The rights shares enter your FIFO lot register as a new lot with the allotment date and the rights price as the cost.

Example: You hold 100 shares of Bajaj Finance at Rs 7,000 each. The company announces a 1:5 rights issue at Rs 5,000 per share. You are entitled to 20 rights shares (100 / 5 = 20).

You subscribe to the rights issue and receive 20 shares at Rs 5,000 each. Your lot register now has: - Lot 1: 100 shares at Rs 7,000 (original purchase) - Lot 2: 20 shares at Rs 5,000 (rights issue)

The holding period for rights shares starts from the date of allotment, similar to bonus shares.

If you sell 110 shares at Rs 7,500: - First 100 from Lot 1 (cost Rs 7,000): Gain = Rs 500/share, total Rs 50,000 - Next 10 from Lot 2 (cost Rs 5,000): Gain = Rs 2,500/share, total Rs 25,000

Note the rights shares show a larger gain per share because they were acquired at a lower cost. If the rights shares are still short-term, this gain is STCG at 20%.

An important nuance: if you choose to renounce (sell) your rights entitlement instead of subscribing, the proceeds from the renouncement are treated as short-term capital gains, regardless of how long you held the original shares.

Buyback: Proportional Reduction in Holding

When a company buys back shares, it purchases shares from existing shareholders, typically at a premium to the market price. If your shares are accepted in the buyback, those shares are removed from your holding.

For tax purposes, the key consideration is the cost basis of the shares tendered in the buyback. Under FIFO, the oldest shares are deemed to be tendered first.

Example: You hold 200 shares of Infosys: - Lot 1: 100 shares at Rs 1,200, bought January 2023 (long-term) - Lot 2: 100 shares at Rs 1,600, bought March 2024 (long-term)

Infosys announces a buyback at Rs 1,850 per share. You tender 50 shares and they are accepted.

Under FIFO, the 50 tendered shares come from Lot 1 (the oldest). Cost = Rs 1,200 per share. Buyback price = Rs 1,850. Gain = Rs 650 per share. Total gain = Rs 32,500.

Since the shares are long-term, this is LTCG. However, note that buyback income in the hands of shareholders may be treated differently under recent tax amendments. As of July 2024, dividends received by shareholders from buyback are taxable. The exact tax treatment depends on the specific buyback mechanism and prevailing law at the time.

After the buyback, your lot register updates: - Lot 1: 50 shares at Rs 1,200 (50 of 100 consumed by buyback) - Lot 2: 100 shares at Rs 1,600 (unchanged)

The FIFO queue continues from the remaining 50 shares in Lot 1 for any future sales.

FIFO Lot Register After Multiple Corporate Actions

Key Takeaways: Corporate Actions and Your Cost Basis

Corporate actions change the structure of your holding but follow clear, predictable rules for cost basis and holding period. Here is a summary:

• Stock split: Total cost unchanged. Per-share cost adjusts proportionally. Holding period unchanged. FIFO order unchanged.

• Bonus issue: Bonus shares have zero cost. Original shares retain their original cost. Holding period for bonus shares starts from allotment date, not original purchase date. This means bonus shares may be short-term even when original shares are long-term.

• Rights issue: Cost equals the rights price paid. Holding period starts from allotment date. Rights shares enter the FIFO queue as a new lot.

• Buyback: Shares tendered are matched via FIFO (oldest first). The remaining lots continue in the FIFO queue.

• Multiple corporate actions stack: Each action modifies the lot register, and subsequent actions build on the modified register. The sequence matters.

• Transaction charges for corporate actions (like rights subscription) should be included in the cost basis.

For investors holding stocks with a history of corporate actions, maintaining an accurate lot register is essential. Errors compound over time, and incorrect cost basis can lead to significant under- or over-payment of tax. TaxHarvestLab tracks corporate actions and adjusts your lot register automatically, ensuring your FIFO computations are always accurate.

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