Tax implications of Bonus Stripping in India

The budget 2022 presented by the Finance Minister brought about amendments to Section 94(8) to avoid the practice of tax evasion using Bonus Stripping.

Under the Income Tax Act, bonus stripping is a practice for reducing the tax burden. A bonus stripping arrangement is one in which a person who wants to reduce the tax burden applicable to his assessment buys stocks before the record date and sells the units after the record date, when the unit price becomes ex-bonus.

Check out more about Bonus Stripping here

Got any other questions? Ask them away and we’d love to help you out !!

Hey, can you please tell me, what announcement was made in Budget 2022 related to Bonus Issue?

Hey @kriti

A amendment to Section 94(8) of the Income Tax Act was enacted in Budget 2022. 'Securities and units' was changed for the phrase 'units.' As a result, Bonus Stripping can now be restricted in the case of both equity shares and mutual fund units under Section 94(8). This change would be effective from April 1, 2023.

What is section 94(8) of the Income tax act?

Hi @ShreyaSharma

The current provision of the sub section (8) of section 94 of the act contains anti- avoidance provisions to deal with bonus stripping transactions.

As per Section 94(8), if:

  • An investor buys mutual fund units within a period of 3 months prior to the record date of the bonus issue AND
  • The investor sells all or any of the original shares within a period of 9 months after the record date of the bonus issue.

such provisions of striping also apply to cash equity trades transactions for all kinds of corporate actions e.g. rights , bonus , dividend etc . ?

i have heard that i a trader/investor can take advantage of such stripping in profit loss gain adjustment if he has 2 demat accounts . e.g. on dividend record date ; sell the stock from the 1 demat and buy it from the other demat account !

is such kind of Shrewd practices still prevalent ?

@Sakshi_Shah1 can you help ?

Hey @HIREiN

As of now, there are restrictions on Bonus Stripping of shares and units of mutual funds as per Section 94(8) of Income Tax Act. Further, there are restrictions on Dividend Stripping of shares and units of mutual funds as per Section 94(7) of the Income Tax Act. A list of other actions has been mentioned under Section 94 of the Income Tax Act for the such restrictions have been introduced by the income tax department.

Can you theow light also on Section 94(8).

Hi @Yashvardhan_Agarwal

Hope this helps !!

Hi

As per Budget 2022, the loss resulting from bonus stripping of shares is now considered as cost of acquisition for the remaining bonus shares.

Further if the original shares are sold 9 months after the date of bonus, will the loss of these shares be allowed under the income tax act as the original shares are sold after 9 months and the provision says:

such person sells or transfers all or any of the 49a
[securities or] units referred to in clause (a) within
a period of nine months after such date, while continuing to hold all or any of the additional
49a
[securities or] units referred to in clause (b)

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Hi

Would this section have impact on the currently running WIPRO buyback offer in which I am a long term shareholder and have bonus shares issued more than 5 years back?

Hi

Please reply to the above query. Thanks

Hi @gdshan,

The provisions of Bonus stripping apply when you purchase the shares within 3 months of announcement of bonus issue and sell within 9 months after the issue. In your stated case, the bonus issue was 5 years ago, this provision will not be applicable.

Hope this clarifies!

In my case, I had sold some shares that were covered under Section 94(8). However, I had sold not just the original shares based on which the bonus shares were received but also all of the allotted bonus shares on the same date.

I had a loss of 45k on the bonus shares that would be disallowed under section 94(8). However, that loss would be added to the cost of bonus shares I received according to section 94(8) and hence the profit on the bonus shares would be 45k lower than it would have been without section 94(8).

This year’s tax return asks us to input the loss disallowed under section 94(7) or 94(8). Am I required to enter any value for this is my case since the disallowed loss has already been offset by the increase in the cost of the bonus shares that I sold on the same date as the original shares ?

To provide the numbers, the original shares were bought for 1L. I sold all the shares for 1.1L. The proceeds from the original and bonus shares were 55k each. So, I have a loss of 45k on the original shares and a profit of 55k on the bonus shares. Under 94(8) , I have no loss on the original shares and a profit of 10k on the bonus shares ( since 45k disallowed loss would be added to the acquisition cost).
If I report my CG as 10k and also report 45k as amount disallowed, it will show the taxable income as 55k which is clearly incorrect.

It seems my options are 1 ) to either report 0 income for the original shares and 10k for the bonus shares and enter nothing for loss disallowed or 2) enter 45k loss for original shares and 10k profit for bonus shares and enter 45k as loss disallowed. It seems the latter is the correct option. Can someone please confirm?

Hey @Noob,

Yes, you are correct as stated by you the second option reporting is correct. The loss on sale of original shares will be disallowed and the loss disallowed will be considered as cost of acquisition for bonus shares.

Hope this clarifies!

Assuming a person has 2 DMat accts as you suggest, how exactly does this work to save tax? Can you provide a detailed example?