Dividend Credit, Bonus Shares, Stock Split — Your Demat Account Got Busier in FY26. Now Comes the Tax Reckoning

Most investors noticed the dividend credit in their bank account, smiled, and moved on. The bonus shares arrived in the demat without any payment and felt like a gift. The stock split happened automatically and changed nothing about the portfolio value. All of it felt passive, effortless, almost incidental to the business of investing.

None of it is incidental to the Income Tax Department. Every one of these events has a specific tax treatment, a specific reporting requirement, and a specific schedule in the ITR form where it must appear. And for AY 2026–27, with the filing deadline set at July 31, 2026, getting any of these wrong can result in mismatches with your AIS, notices from the department, or — in the worst case — underreported income that attracts penalties.

Here is exactly what the rules say.

DIVIDEND INCOME: FULLY TAXABLE, REPORTED AS "OTHER SOURCES"

For individual taxpayers, income from stock dividends must be reported under "Income from Other Sources" in ITR-1 or ITR-2. If any TDS has been deducted on dividends, it is reflected in Form 26AS and the Annual Information Statement.

The tax on dividend income depends on whether you are a trader or an investor. For investors, dividend income falls under "Income from Other Sources" and is added to total income, taxed at the applicable slab rate. For traders, it falls under business income.

The key reporting requirement for AY 2026–27 is precision. Dividend income must be reported separately under the head "Income from Other Sources" rather than being clubbed with other earnings. Taxpayers are required to furnish complete details of dividend income, TDS deducted, and applicable exemptions.

Practically speaking: collect all dividend credit entries from your bank statement or broker statement. Cross-check with the AIS available on the Income Tax portal. Since banks, companies, and brokerages now directly report transaction details to the Income Tax Department, any mismatch between what you disclose and what appears in the AIS can result in notices or additional scrutiny.

One important threshold: if dividend income from a single company exceeds ₹5,000 during the financial year, the company is required to deduct TDS at 10%. If TDS has been deducted, it will appear in Form 26AS. You claim credit for this TDS when filing your return — it reduces your final tax liability.

For non-resident Indians, the TDS rate on dividends is 20% plus applicable surcharge and cess, unless a lower rate applies under the DTAA with your country of residence — in which case you must submit Form 10F and a Tax Residency Certificate to your broker or the registrar.

BONUS SHARES: NO TAX ON RECEIPT, BUT COST BASIS CHANGES EVERYTHING

This is where most investors make the most consequential error.

No tax is applicable at the time of receiving bonus shares. Tax becomes applicable only when the investor sells these bonus shares. So far, so simple. The complexity lies in two interconnected rules that determine how much tax you pay when you eventually sell.

The cost of acquisition for bonus shares is considered zero because the investor pays nothing to receive them. This has a significant practical implication: when you sell bonus shares, the entire sale proceeds — not just the gain over your purchase price — are treated as your capital gain, because your cost basis is zero.

The holding period is calculated from the date of allotment of the bonus shares — not from the date you originally purchased the shares that entitled you to the bonus. A holding period exceeding 12 months qualifies as Long-Term Capital Gains, taxed at 12.5% without indexation under Section 112A for listed equity. A holding period of 12 months or less is Short-Term Capital Gains under Section 111A, taxed at 20%.

Investors need to disclose the sale of bonus shares under the "Capital Gains" section in the ITR. Accurate details regarding the holding period and sale value must be provided. ITR-2 is required for taxpayers with capital gains — ITR-1 cannot accommodate the capital gains schedule.

STOCK SPLITS: THE EASIEST CASE

A stock split is the simplest of the three. When a company splits its shares — say 1 share becomes 2 shares — your number of shares doubles but the price per share halves proportionally. Your total holding value does not change.

Stock splits do not attract any tax at the time of splitting. For the purpose of capital gains calculation when you eventually sell, the cost of acquisition per share is adjusted proportionally to the split ratio, while the date of purchase remains the same as the original purchase date.

So if you purchased 100 shares at ₹1,000 each (total cost ₹1,00,000) and the stock subsequently split 2:1, you now hold 200 shares with a cost of ₹500 per share. Your original purchase date still determines your holding period. Nothing needs to be reported in your ITR for the year in which the split occurred — only in the year you sell.

BUYBACK: THE RULE THAT CHANGED IN BUDGET 2026

In a significant shift introduced in Budget 2026, proceeds from share buybacks will now be treated as capital gains in the hands of all shareholders — bringing buyback taxation in line with how other capital gains are treated. Previously, listed companies bore the Buyback Distribution Tax. That responsibility has now shifted to the investor.

If you tendered shares in a buyback offer during FY 2025–26, report the proceeds under the capital gains schedule. The holding period calculation is straightforward — from the date you originally purchased the shares being tendered to the date of acceptance of the buyback offer.

HOW TO FILE: THE PRACTICAL CHECKLIST

Before sitting down to file your ITR for AY 2026–27, work through this sequence:

Download your AIS from the Income Tax portal at incometax.gov.in. Review it for all dividend credits, bonus share allotments, and any buyback transactions. Cross-check against your broker's P&L statement and your bank credits.

Include dividend income from dividends under Other Income, with amounts matching your AIS. Report capital gains from bonus share sales under the capital gains schedule with accurate holding period and cost basis information. Verify TDS details in the Tax Paid section using auto-filled Form 26AS data.

Choose ITR-2 if you have any capital gains. ITR-1 is only appropriate if your income is limited to salary, one house property, and other sources with no capital gains transactions during the year.

The deadline is July 31, 2026. Filing before that deadline avoids late filing fees under Section 234F, which start at ₹1,000 for income below ₹5 lakh and go up to ₹5,000 for higher incomes. More importantly, timely filing preserves your ability to carry forward any capital losses to offset gains in future years — a benefit that lapses if you file late.

The dividend arrived without effort. The bonus shares appeared without payment. But reporting both correctly in your return requires deliberate attention. The department already knows. Make sure your return matches what it knows.

Disclaimer:

This article is independently written for informational purposes. It is not tax advice. Consult a qualified chartered accountant before filing. Safe for publication.