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.
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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.
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 ?
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.
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)
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?
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.
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?
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.
Can someone confirm that this section will not be applicable if the shares were bought more than 3 months prior to the bonus share record date but sold immediately after the record date ?
original shares should have been bought not more than 3 months before the record date, AND
original shares are sold less than 9 months after the record date
required to be fulfilled for the section to be applicable.
I bought the shares 9 months before the record date and sold them the day after the record date. At the time of buying , I had no idea that bonus shares were going to be issued after 9 months . Will the loss on selling the original shares still be disallowed for me ? That seems unfair since I obviously didn’t buy the shares with bonus stripping in mind.