A bank you hold declares a 15 percent bonus. Your Meroshare balance jumps by 15 shares for every 100 you owned, and the message boards fill with congratulations. Nothing left your account. Nobody sent you a bill. It feels like the market handed you something for nothing. It did not, and the gap between that feeling and the tax reality is the whole point of this article.
The bonus share tax in Nepal is one of the most misunderstood costs in the market, because most retail investors believe there is no cost at all. There is. A bonus share carries a tax charge at the moment it is issued, and it quietly raises the tax you will pay when you eventually sell. Neither of those is visible on the day your share count goes up, which is exactly why people miss them. If you are going to chase bonus-heavy stocks, and a lot of Nepali investors do, you should at least know what the bonus is actually costing you.
This piece separates two things that get muddled: the tax when a bonus lands in your account, and the tax when you sell the shares later. It compares a bonus with a straight cash dividend, and it takes a position on when a bonus is worth having and when you are just deferring a bigger bill.
What a bonus share really is
Start with the mechanics, because the tax follows from them. A bonus share is not created out of thin air. The company takes money it already owns, its accumulated profit sitting in reserves, and converts that reserve into share capital. You get more shares. The company gets a larger paid-up capital. Its net worth does not change by a single rupee, because nothing came in and nothing went out. The pie was cut into more slices.
This matters for tax because Nepal’s law does not treat that conversion as a neutral, invisible event. Under the Income Tax Act 2058, the capitalization of profit is a distribution of profit, the same category as a cash dividend. Section 53 of the Act treats both a cash payout to shareholders and the capitalization of earnings into bonus shares as distribution, which is why a chartered accountant analysis of the rules concludes plainly that bonus shares are taxed just like cash dividends. The logic the law leans on is that once retained earnings become share units, those units are tradable and therefore realizable. You can sell them tomorrow. So the tax system charges the distribution now.
That is the first cost, and it is the one almost nobody accounts for.
The tax when the bonus is issued
When a company distributes a bonus, it owes dividend tax on the distribution. For an individual resident shareholder the dividend tax rate in Nepal is 5 percent, and it has sat at 5 percent for both residents and non-residents since the fiscal year 2066/67, according to the historical rate summary compiled from the Income Tax Act by tax practitioner Sushil Parajuli.
Here is the part that trips people up. The 5 percent is not charged on the market value of your new shares. It is charged on the capitalized face value, the par amount the company moves from reserves into share capital. Nepali ordinary shares have a face value of NPR 100. So if you receive 15 bonus shares, the taxable distribution behind them is 15 multiplied by NPR 100, which is NPR 1,500, and the dividend tax is roughly 5 percent of that, not 5 percent of whatever those shares are worth on the floor. On a stock trading at NPR 500, your 15 shares are worth NPR 7,500 in the market but the tax is calculated off the NPR 1,500 face value. That is a genuine and often overlooked mercy in the rule. The tax base is the par value, which is usually far below the market price.
Small does not mean zero. The charge is real, and until recently the awkward question was who actually pays it. Because a bonus involves no cash changing hands, there is no cash from which to deduct the 5 percent. Companies handled this in two ways. Some grossed the distribution up and announced a token cash dividend alongside the bonus purely to cover the withholding. Others did something that looks strange from the outside but became common in Nepal: they asked shareholders to deposit the tax themselves before the bonus shares would be credited. If you have ever seen a notice from a bank or insurer urging shareholders to pay the tax on a bonus, that is this mechanism. Janata Bank, Himalayan Life Insurance and others have all issued exactly that kind of notice in recent years.
The rule changed in late 2025, and it helps you
There is a fresh development that most evergreen explainers have not caught up with. In November 2025, the Securities Board of Nepal (SEBON) amended its rules so that companies, not shareholders, must handle the bonus tax.
The change came through the 10th Amendment to the Securities Issuance and Allotment Directive, which added a provision requiring every SEBON-registered institution to deduct and pay the dividend tax itself when distributing bonus shares, according to the reporting on the amendment by ICT Frame. In plain terms, the company is now the withholding agent. You should receive your full bonus allotment without being chased to deposit tax into a separate account first.
Do not read this as the tax disappearing. The 5 percent dividend charge on the capitalized value still exists. What changed is the paperwork and the collection point, not the liability. The cost is now buried inside the company’s distribution rather than landing on your desk as a demand, which is more convenient and easier to miss. Convenience is the enemy of clear thinking about tax. The levy is still being paid out of value that ultimately belongs to shareholders.
The second cost: what the bonus does to your cost basis
Now the part that shows up years later. Your capital gains tax when you sell is measured against your weighted average cost, the blended price the system treats as what you paid. A bonus share costs you nothing, so it drags that average down, and a lower average means a larger taxable gain on every share you later sell.
Work it through. Say you hold 400 shares at a weighted average cost of NPR 400, so your total invested is NPR 1,60,000. The company declares a 20 percent bonus and you receive 80 shares. Your share count rises to 480. Your total invested is still NPR 1,60,000, because the bonus was free in cash terms. Your new weighted average cost is NPR 1,60,000 divided by 480, which is NPR 333.33.
Before the bonus, only the amount you sold above NPR 400 was taxable gain. After the bonus, everything above NPR 333.33 is taxable. The bonus handed you more shares but lowered the line above which the taxman starts counting. Sell the whole holding at NPR 600 and your taxable gain is larger than it would have been without the bonus, even though your rupee proceeds are similar, because the market price adjusts down after a bonus while your basis falls too. The detailed mechanics of how each buy, bonus and rights event rebuilds this number are covered in our explainer on how your share cost basis is calculated for tax in Nepal.
The rate that then applies to that gain changed in the latest budget. For the fiscal year 2083/84 (2026/27), capital gains tax on listed shares for an individual is 10 percent on shares held one year or less and 7.5 percent on shares held more than a year, and it is now a final tax, as reported by The Himalayan Times and set out in the federal budget highlights published by the Institute of Chartered Accountants of Nepal. We break down those rates and what final tax means in our guide to Nepal’s new capital gains tax for 2026/27.
One honest caveat. Public calculators and commentators are not fully consistent on the cost basis they assign to bonus shares. Some treat the bonus as arriving at zero cost, as in the example above. Others assign the par value. The two give different weighted averages and therefore different gains. The prudent step before selling a bonus-heavy position is to check what figure the Central Depository System (CDSC) is actually holding for your stock, rather than trusting a third-party tool. Confirm the number before you sell, not after the tax is withheld.
Bonus versus cash dividend: the comparison that matters
Put the two side by side, because the choice is where the tax planning actually lives.
A cash dividend is simple. The company pays cash, deducts 5 percent dividend tax at source, and you receive the rest. That withholding is final for an individual. You keep the cash, the tax is settled, and nothing follows you into the future. What you see is what you get.
A bonus is a deferral dressed up as a gift. You pay a 5 percent dividend charge on the face value now, usually invisibly, and you receive shares instead of cash. Those shares lower your cost basis, so you carry a larger future capital gains liability until the day you sell. The upside is real: your holding compounds, you own more of a company you presumably like, and you decide when to trigger the eventual capital gains event rather than having cash forced into your hands. The downside is that you have not escaped tax. You have moved a small dividend tax to today and stacked a larger capital gains tax onto tomorrow.
Which is better depends on you, not on which sounds more generous. If you need income, a cash dividend is the honest answer, and chasing bonuses to feel richer while your cash flow stays flat is a common trap. If you are a genuine long-term holder with no need for the cash and real conviction in the company, the bonus lets you compound and defer, and deferral has value. What you should not do is treat a bonus as free money and a cash dividend as the taxed option. Both are taxed. The bonus is simply taxed in two smaller instalments spread across time, and the second instalment grows with the share price.
For traders who move in and out, the calculus tilts further against the bonus mystique. A bonus you receive and sell within a year is taxed at the 10 percent short-term capital gains rate on a gain inflated by your lowered basis, on top of the dividend charge already paid at issuance. The “free” shares can end up among the more heavily taxed rupees in your account.
Why so many Nepali companies still issue bonuses
If bonuses are not the free lunch they appear to be, why are they everywhere on NEPSE, especially among banks and insurers? The answer is mostly about the company, not you.
Nepal Rastra Bank and the Insurance Authority set paid-up capital requirements, and issuing bonus shares is the cleanest way for a bank or insurer to grow paid-up capital out of its own retained earnings without asking shareholders for fresh cash. A bonus also conserves the company’s cash, which a large cash dividend would drain. And in a retail market that treats a bonus announcement as bullish, the signal itself can support the share price in the short term. None of those three reasons is about minimizing your tax. They are about the issuer’s balance sheet and the market’s mood. Keep that in mind the next time a bonus announcement is framed as a reward. It is often a capital management decision that happens to be popular.
The verdict
Stop calling them free shares. A bonus in Nepal is taxed twice over its life: a 5 percent dividend charge on the capitalized face value the moment it is issued, now collected by the company under the 2025 SEBON amendment rather than billed to you, and a larger capital gains tax later because the bonus lowers your cost basis. A cash dividend, by contrast, is taxed once at 5 percent and then finished with.
That does not make bonuses bad. For a patient holder who wants to compound and control the timing of the eventual gain, a bonus can be the better outcome despite the tax, and the par-value tax base keeps the upfront charge modest. But make that a decision, not a reflex. Ask whether you actually want more of this company or whether you just like watching the share count rise. Check what cost basis CDSC records for your holding after every bonus, because that single number drives your future tax. And when a company offers a choice between cash and bonus, price both against your own need for income and your own time horizon, not against the false idea that one is taxed and the other is a gift.
The investors who understand this do not chase bonuses. They weigh them. For the mechanics of the underlying capital gains rules that make the second cost bite, see our explainer on capital gains tax on NEPSE.
This is analysis, not financial advice.
