Demystifying Bonus Stripping and the Impact of Budget 2022

Understanding Bonus Share Issuance: Companies issue bonus shares to existing shareholders without extra cost. The aim is to capitalize on reserves, not raise capital. Explaining Bonus Stripping: Investors buy shares before bonus issue and sell after, aiming for tax benefits. Short-term capital losses offset other gains, reducing tax liabilities.

Benefits of Bonus Stripping: Investors gain profits while paying reduced taxes. Long-term capital gains from bonus shares enjoy tax exemptions. Example of Bonus Stripping: Mr. A buys mutual fund units before bonus issue, sells original shares post-bonus, and retains bonus shares for long-term gains.

Budget 2022 Amendment - Section 94(8): Aims to curb tax evasion through bonus stripping. Extends to cover both securities and mutual fund units. Impact of Amendment on Investors: Short-term losses from bonus stripping will not be considered for tax calculation. Loss amount will be treated as the acquisition cost for bonus shares.

Illustration of Amendment's Impact: Nippon Mutual Funds example demonstrates the application of Section 94(8). Short-term losses cannot be set off or carried forward. Conclusion: Bonus stripping, once a tax-saving strategy, faces restrictions post-Budget 2022. Investors must adapt to the new regulations for tax compliance and effective financial planning.