Tax Treatment of Rights and Bonus Shares

First published 23 Aug 2026 · Last verified 29 Aug 2026

Ramesh had followed the textbook advice from the previous chapter to the letter. When Karnali Finance Ltd. declared a 15 percent stock dividend, he watched his DEMAT statement update, saw the 5 percent tax deducted at source on the deemed dividend value, and filed the withholding certificate away as instructed. Six months later, when Himalchuli Cement Ltd. announced a 1:1 rights issue at par, he transferred the money through his bank's Connect IPS account, received his new shares, and assumed the matter was closed. It was not. When he eventually sold both blocks of shares, his broker's contract note showed two entirely different capital gains figures, calculated on two entirely different cost bases, and neither number matched what he had expected from either transaction. The confusion was not Ramesh's fault — it reflects a genuine, still-unsettled area of Nepali tax administration, one that has produced regulatory directives, investor protests on the trading floor, and at least one government task force. This chapter untangles it, lesson by lesson, so that you never have to discover the difference between a rights share and a bonus share at the moment your broker hands you a tax bill.

Lesson 37.1 — Two Different Doors: How Rights and Bonus Shares Enter the Tax System

Chapter 36 established the core rule for bonus shares: when a company capitalises reserves and distributes additional shares to existing holders, the Inland Revenue Department treats this exactly as it treats a cash dividend. Under the dividend-withholding framework of the Income Tax Act, 2058 — administered through Section 88 provisions on dividend distribution — a 5 percent withholding tax applies to the value of the bonus at the moment of issuance, and that 5 percent becomes a final tax for a resident individual investor. No further income tax return disclosure is required on that amount. This is settled law and settled practice, and every listed company in Nepal that has ever declared a stock dividend has had to work out, cycle after cycle, how to raise the cash to pay that withholding when the "dividend" itself arrived in the form of paper, not rupees.

Rights shares operate on an entirely different logic, and this is the piece the previous chapter deliberately left aside. A rights issue is not a distribution of the company's retained earnings to you. It is an offer to buy new shares, at a price the company sets (commonly at par value, sometimes at a premium), using your own after-tax money. Because you are handing over cash you already earned and already paid tax on — through your salary, your business income, or an earlier capital gain — there is no "income" event for the tax authority to tax at the moment you subscribe. You are simply converting cash into a different asset, the same as if you had bought additional shares of the same company on the secondary market. No withholding tax applies to a rights subscription. No deemed-dividend character attaches to it. The tax event, for a rights share, is deferred entirely to the day you eventually sell.

This distinction matters practically because it determines two different things for you as an investor: whether tax is owed today, and what number gets written into the ledger as your cost basis for tomorrow.

Lesson 37.2 — Rights Shares: Establishing Cost Basis From Day One

Because a rights subscription is a genuine purchase, its cost basis is built the same way any purchase's cost basis is built: the price paid, plus the costs you incurred to acquire the asset. For a rights issue this typically includes the per-share issue price set by the company (frequently Rs 100 per share at par, though premium rights issues do occur), any bank service charge or ASBA (Applicant Supported by Blocked Amount) processing fee deducted at the time of application, and any DP (Depository Participant) charge associated with crediting the shares. None of this is exotic — it is the same logic Chapter 34 used for ordinary secondary-market purchases — but investors routinely forget to carry these small charges forward, and over a multi-year holding period the omission compounds.

Worked example: Suppose you hold 500 shares of Himalchuli Cement Ltd., and the company announces a rights issue in the ratio of 1:2 (one new share for every two held) at an issue price of Rs 100 per share. You are entitled to 250 new shares.

Cash paid: 250 shares × Rs 100 = Rs 25,000 ASBA/bank processing charge (flat, illustrative): Rs 10 Total cost basis added: Rs 25,010 Cost basis per rights share: Rs 25,010 ÷ 250 = Rs 100.04

This Rs 100.04 per share is what enters your holding's weighted average cost calculation — not zero, not the current market price of the parent share, and not the face value used for bonus shares. It is simply what you paid, itemized the same way a cash purchase would be.

A subhead worth pausing on:

What if you don't subscribe

Every rights entitlement carries three choices: subscribe fully, subscribe partially, or let the entitlement lapse (or, where the company and depository system permit it, renounce/sell the entitlement to another investor before the subscription window closes). Each choice has a distinct tax consequence.

If you simply let the entitlement lapse — take no action — you incur no tax event, but you also permanently dilute your percentage ownership, since other shareholders' capital is added to the company while yours is not. There is no cost basis question here because no asset was acquired.

If you renounce or sell your rights entitlement (where the DP system and the issuing company support a tradable rights ticket, as is increasingly common for larger rights issues routed through the CDS and Clearing system), the proceeds you receive for that entitlement are treated as a capital gain in their own right, because your cost basis in the "right to subscribe" itself is effectively nil — you did not pay anything separately to acquire the entitlement; it arose automatically from your existing shareholding. The entire sale proceeds of a renounced rights entitlement are therefore exposed to capital gains tax, calculated at the short-term or long-term rate depending on how long you had held the underlying parent shares that generated the entitlement.

Lesson 37.3 — Bonus Shares Revisited: From Deemed Dividend to Cost Basis

Chapter 36 walked through the mechanics of the withholding calculation itself — the gross-up formula that requires a company to divide the announced bonus value by 0.95 to determine the pre-tax distribution, then withhold 5 percent of that grossed-up figure. This chapter will not repeat that arithmetic. What it must add, because the earlier chapter stopped short of it, is what happens to that already-taxed value afterward: how it becomes your cost basis, and why the Nepali tax administration has struggled — publicly and repeatedly — to settle on the correct number.

The logic, in principle, is straightforward. If the value of a bonus share has already been taxed once, as a deemed dividend, then that same value should become your cost basis for the share going forward. When you eventually sell, capital gains tax should apply only to the appreciation above that already-taxed value — not to the entire sale proceeds. This is the only construction that avoids taxing the same rupee of value twice.

In practice, "the value of a bonus share" for this purpose has historically been anchored to the share's face value (commonly Rs 100 for most NEPSE-listed companies, though some older listings carry different paid-up denominations), because the deemed-dividend withholding itself is calculated against that face value at the point of capitalisation, not against the fluctuating market price.

The directive triggered an immediate and visible backlash. Retail investors, through their associations, argued the change had been imposed without adequate notice and that it interacted badly with how brokers' systems were already tracking cost. Trading activity was disrupted, and the government responded within days by postponing implementation and forming a task force to review the formula before any change took effect. The episode is worth knowing not because the specific 2075 directive is still the live rule in every particular — practice has continued to evolve since, and DP-registered WACC figures vary by broker system — but because it crystallises the exact fault line investors keep hitting: is the cost basis of a bonus share its face value, or is it zero?

Why the answer matters enormously

If your bonus share's cost basis is recorded as its face value (say Rs 100), and you later sell it at Rs 850, your taxable capital gain is Rs 750 per share.

If your bonus share's cost basis is instead recorded as zero — as some broker calculators and even some DP account statements default to, treating "you paid nothing for it" too literally — your taxable capital gain balloons to the full Rs 850 per share.

The difference is not academic. At a long-term capital gains rate, the zero-basis treatment can nearly double your effective tax bill on the bonus portion of your holding, and it does so on top of the 5 percent dividend withholding you already paid when the bonus was issued. This stacking is precisely the "double taxation" complaint that recurs in investor forums, brokerage seminars, and Finance Bill consultations year after year.

The prudent position for an investor — and the one this book recommends you hold your broker and DP records to — is that the face value already subjected to the 5 percent withholding must carry forward as cost basis. Keep the TDS (tax deducted at source) certificate the company issues at the time of the bonus distribution; it is your documentary proof that this value has already been taxed, and it is the evidence you would present if a broker's system defaults to zero and you need to have it corrected.

Lesson 37.4 — WACC Mechanics: Blending Purchases, Rights, and Bonus Into One Average Cost

Nepali capital gains tax on listed shares is calculated on a script-by-script (company-by-company) basis, and within a single script, on a single blended weighted average cost — not on a first-in-first-out layer-by-layer basis, and not by treating each acquisition (original purchase, rights allotment, bonus allotment) as a separately taxed lot. This is what market participants and brokers universally refer to as "WACC" — weighted average cost — and it is the number your DP account and MeroShare portfolio are expected to carry for every script you hold.

The formula is simple in isolation:

WACC = Total Cumulative Cost of All Units Held ÷ Total Units Held

The complexity comes from the fact that every corporate action — a fresh purchase, a rights allotment, a bonus allotment — changes both the numerator and the denominator, and the two share types change them in structurally different ways:

A rights allotment adds units and adds a proportionate amount of real cost (what you paid), so it can push the WACC either up or down depending on whether the rights issue price is above or below your existing WACC.

A bonus allotment adds units and adds only the already-taxed face value as cost (not zero, per Lesson 37.3, but also not the market price), which is virtually always below your existing WACC, so a bonus issue almost always pulls your average cost per share downward.

Worked example, step by step

Assume an investor's activity in a single script, Himal Hydro Ltd., across three years:

Notice the direction of each move. The rights allotment, priced well below the prevailing WACC of Rs 401.60, pulled the average down to Rs 301.10 — a rights issue priced at a discount to your cost base will always do this, and a rights issue priced above your existing WACC would push it up instead. The bonus allotment then pulled the average down further, from Rs 301.10 to Rs 282.82, because the face-value cost of Rs 100 per bonus share is virtually always below whatever the blended average happens to be at that point — this is close to a mechanical certainty for any company whose share price trades above face value, which is the overwhelming majority of the exchange. The final market purchase, executed above the prevailing WACC, pushed the average back up to Rs 330.25.

This single blended figure — Rs 330.25 in the example above — is what your broker's system will apply against the sale price of any shares of Himal Hydro Ltd. you dispose of afterward, regardless of whether the specific shares being sold happen to be original purchases, rights shares, or bonus shares. The tax system does not ask "which shares are these"; it asks "what is your current average cost across this entire script," and taxes the difference between that average and your sale price.

Lesson 37.5 — The Double-Taxation Debate and the Current Rate Environment

The debate over whether a bonus share's cost basis should be its face value or zero is not a settled historical footnote — it is a live undercurrent in how Nepali investors and the tax administration relate to each other, and it resurfaces every time the government revisits capital gains policy. Understanding the shape of the argument is more useful to you than memorising any single year's administrative position, because the position has moved before and will likely move again.

The investor-side argument runs as follows: a bonus share is not free money. The company created it by capitalising reserves that, in most cases, represent past retained profits — profits the company itself had already paid corporate income tax on. The shareholder is then taxed a second time, at 5 percent, when the reserve is converted into a share and credited to the shareholder's account, on the theory that this is economically equivalent to a cash dividend. If the same value is taxed a third time at full capital gains rates when the share is eventually sold — because the DP or broker system recorded its cost basis as zero rather than as the face value already subjected to withholding — the investor is being taxed three times on a single stream of value: once at the corporate level, once as a deemed dividend, and once again as if the share cost nothing at all. It is this third layer, specifically, that investors and their associations have objected to whenever a zero-basis or aggressive-basis directive has been floated.

The tax administration's counter-perspective is that capital gains tax is not really "on the same value" a third time — it is a tax on the appreciation of the asset since the point the investor's holding cost was fixed, and the entire policy question reduces to what that fixed point should be. Using face value keeps that fixed point anchored to the amount already taxed as dividend; using a market-linked average base price (the pre-2075 practice) or zero (the practice some systems still default to) shifts that fixed point elsewhere, with correspondingly different revenue and equity consequences. This is precisely the tension the 2075 directive, the subsequent investor protest, and the government's task force were convened to resolve, and it explains why you should treat "cost basis of a bonus share" as a topic to verify against your own documentation each time you file, rather than a fact you can assume is fixed for all time.

Layered onto this structural debate is a separate, more recent development: the headline capital gains tax rate itself has just risen. Under the Finance Bill presented for fiscal year 2083/84 (the current fiscal year at time of writing, effective from Shrawan 1, 2083 — mid-July 2026), the rate applied to gains on listed shares held for one year or less rose from 7.5 percent to 10 percent, and the rate on gains from shares held for more than one year rose from 5 percent to 7.5 percent. Gains on unlisted company shares continue to be taxed at a flat 10 percent regardless of holding period. For an individual, non-commercial investor, this remains a final withholding tax deducted by the broker at settlement — you are not required to separately disclose it on an income tax return, and it is not added to your other income for slab-rate purposes, provided your share transactions do not rise to the level of a commercial trading business (a distinction the Department has separately confirmed applies the ordinary, natural-investor rules to small, non-commercial holders rather than folding them into a business-income framework).

The practical takeaway for you, as an investor rather than a policy analyst, is this: the rate you pay has just increased, which means an error in your cost basis now costs you more than it would have a year ago. A bonus lot mistakenly recorded at zero cost, taxed at the new 7.5 percent long-term rate instead of correctly reflecting its face-value basis, produces a materially larger overpayment than the identical error would have produced under last year's 5 percent rate. This is the moment to actually check your numbers, not the moment to assume the broker's system has it right.

Lesson 37.6 — Practical Filing and Recordkeeping Checklist for Rights and Bonus Shares

Everything in this chapter converges on a single behavioural recommendation: keep your own paper (or digital) trail for every rights and bonus event, independent of what your broker's or DP's system displays, because you — not the intermediary — bear the consequence if the wrong number is used at the point of sale.

For every rights issue you subscribe to, retain: the rights allotment/share certificate confirmation from the company or registrar, the bank debit advice or ASBA confirmation showing the exact amount paid, and any DP or bank charges levied on the application. Together these establish your cost basis for that lot beyond dispute.

For every bonus issue you receive, retain: the company's board/AGM resolution announcing the bonus percentage and the share's face value at the time, and — most importantly — the TDS certificate or equivalent withholding confirmation showing the 5 percent dividend tax was deducted and deposited. This certificate is your evidence that the face value has already been taxed, and it is what you would present to a broker or to the Department if a system default understates your cost basis.

When you eventually sell only part of a script's total holding — some original shares, some rights shares, some bonus shares, accumulated over several years — remember that Nepali practice applies a single blended WACC across the entire script, not a lot-by-lot or first-in-first-out selection. You do not get to choose to sell "the high-cost lot first" to minimise tax; the average is applied uniformly. This makes maintaining an accurate, current WACC — recalculated after every corporate action, as demonstrated in Lesson 37.4's worked table — more important than tracking individual lots, since individual lots do not survive as separate tax objects once they enter your holding.