The Taxman Has An Eye On Your Bonus Stripping Efforts

Section 94(8) of the Income Tax Act says that if shares or mutual fund units have been bought in a period of three months before the record date of the bonus and they have not been held for a period of nine months after the record date while continuing to hold part of or whole of the newly issued bonus shares, then the loss on the shares bought initially will not be allowed for the purpose of the tax calculations.

What this means is that if the investor has bought the original shares within three months of the bonus issue record date and sold it within nine months of the issue, then the investor will have to sell the entire amount of bonus shares to get the benefit of a loss on the original shares. The idea behind this move is that if the investor is forced to sell the bonus shares, then there will be a short term capital gains here (since cost of bonus shares are zero), which will be set off against the short-term capital loss on the original shares.

The other option for the investors is to hold the original shares for at least nine months from the record date and then sell the shares while continuing to hold the entire bonus units. But the risk increases in such a move in the sense that as time passes, the shares might behave in a manner that is different from the expectations which can impact the tax calculations. These provisions, already applicable for mutual funds, are now applicable for equity shares too and it is an effort to ensure that the investor is not just buying the shares to take the benefit of the adjustment in the price due to a bonus issue, leading to a loss of tax revenue.

The write is founder, Moneyeduschool