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

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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 !!