ITR Filing 2026: Dividend, Bonus Shares In Your Demat Account? Do Not Miss These Tax Rules

A dividend credit in the bank account or a few extra shares in the demat account may look like a routine reward for staying invested. But at the time of filing the income tax return, these small entries can matter.

Many retail investors notice dividends only when the money is credited. Bonus shares are often treated even more casually because no payment is made to receive them. But both have separate tax treatment, and mixing them up can lead to wrong reporting in the income tax return (ITR).

However, while both may look like benefits from the same investment, they are not treated in the same way for income-tax purposes. If you received dividend income or bonus shares during the financial year 2025-26, you should check the tax rules carefully while filing your income tax return for the assessment year 2026-27.

The mistake many investors make is assuming that because a dividend has already been paid by a company, or bonus shares were received free of cost, there is no tax implication. That is not always correct. Dividend income can become taxable in the year in which it is received, while bonus shares usually become relevant for tax only when they are sold.

How Dividend Income Is Taxed

Dividend income is now taxable in the hands of the investor. This means the company paying the dividend does not make it tax-free for the shareholder. The investor has to include the dividend amount in the income tax return and pay tax according to the slab rate applicable to him or her, according to a recent report by Mint.

This rule became important after the earlier dividend distribution tax system was removed. Earlier, companies paid a dividend distribution tax before giving dividends to shareholders. After the change, dividends are taxed in the hands of shareholders.

For individual investors, dividend income is generally reported under the head “Income from Other Sources” in the ITR. It should be matched with the figures available in the Annual Information Statement, Taxpayer Information Summary, Form 26AS, bank statement, and broker statement, wherever applicable.

There is also a tax deducted at source (TDS) angle. If the dividend paid by a company exceeds Rs 10,000 in a financial year, tax may be deducted at source. This TDS can be claimed as credit while filing the return, but the income still needs to be reported properly. Merely because TDS has been deducted does not mean the taxpayer can skip reporting the dividend income.

What Happens In The Case Of Bonus Shares

Bonus shares are treated differently. When a company issues bonus shares, the shareholder receives additional shares in the demat account. Since no cash is received at that stage, there is usually no tax payable at the time of allotment.

However, the tax impact comes later, when the investor sells those bonus shares. For income-tax purposes, the cost of acquisition of bonus shares is generally taken as zero. So, the tax question comes up only when the investor sells these shares. Since their purchase cost is taken as nil, the sale proceeds are used to work out the capital gains.

The holding period is counted from the day the bonus shares are allotted. If the investor sells them before completing the required holding period for listed shares, the profit will fall under short-term capital gains. If they are held beyond that period, the gain may be treated as long-term capital gain.

For listed equity shares, short-term capital gains are taxed at 20 per cent. Long-term capital gains are taxed at 12.5 per cent, subject to the exemption limit available for such gains. At present, long-term capital gains up to Rs 1.25 lakh in a financial year are exempt, and tax applies only on gains above that limit.

Which ITR Form May Apply

Investors with capital gains generally need to be careful while choosing the ITR form. If bonus shares were sold during the year and capital gains arose, the details may have to be reported in the capital gains schedule.

In many cases, taxpayers with capital gains use ITR-2. ITR-1 may still work for some resident taxpayers if their long-term capital gains from listed shares are within Rs 1.25 lakh. But this is only if they meet the other ITR-1 conditions and do not have any capital loss to carry forward.

Before submitting the return, investors should go through the dividend entries, broker statement, demat statement, AIS, and Form 26AS carefully. If any dividend income or sale of bonus shares is missed or shown under the wrong head, it may later show up as a mismatch or trigger a query from the tax department.

FAQs

1. Is dividend income taxable while filing ITR?

Yes. Dividend income is taxable in the hands of the investor and should generally be reported under “Income from Other Sources”.

2. Are bonus shares taxable when they are received?

Usually, no tax is payable when bonus shares are allotted. The tax impact comes when the investor sells those shares.

3. Which ITR form should be used if bonus shares are sold?

If the sale leads to capital gains, the investor may need to report it in the capital gains schedule, usually in ITR-2, depending on the case.