Tax on bonus shares in india
After acquiring the bonus shares, she sells the original units 100 shares for Rs. 50,000, incurring a short-term capital loss of Rs. 50,000.
By making bonus issue to the shareholders, the company subtly saves itself from dividend distribution tax. The shareholders also utilize bonus issues as a way to passively reduce tax burden through a process called Bonus Stripping. On the date of the bonus issue, the company issues 100 shares to Ms. X as bonus units. Now she holds the original units valuing Rs. 1,00,000 and bonus units valuing 1,00,000, so a total of Rs. 2,00,000. Let us help you understand bonus stripping with an illustration. Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments. Now, Ms. X buys 100 units of shares in company A, each unit valuing Rs. 1,000. Ms. X holds shares worth Rs. 1,00,000.
In a bonus stripping arrangement, the investor sells the original unit for a short term capital loss but gets his hands-on two kinds of benefits, Bonus stripping is not legal in India, to avoid the occurrence of bonus stripping, the income tax act has enforced certain provisions that indirectly keep a check over such arrangement. An investor buys shares in a company knowing that the company is set to make bonus issues to its existing shareholders and sells the original share after acquiring the bonus issue, This is called bonus stripping.
These provisions are found under section 94(8) of the Income Tax Act which specifies that, Same way, the bonus stripping arrangement is also plausible with mutual fund holders. The distributable surplus can be offered as bonus units to mutual fund holders, where he can exercise the bonus stripping arrangement and become eligible for tax adjustments for the short-term capital loss and get his hands on capital gain, post selling the bonus units. Bonus stripping could be a beneficial way to reduce the tax burden if you are worried about the tax rates for the capital gains on stock, property, or jewelry for a particular financial year. The acquisition price of the bonus share is considered zero, in India. Selling them before one year from the date of bonus issue would attract 15% short-term capital gains tax. In such cases, shareholders are not entitled to book the loss on sale of shares and additionally, this loss will be considered as the purchase price of the bonus units acquired. Before getting into ‘Bonus stripping’ let us understand the concept of ‘bonus issue’. Generally, a company provides dividends to shareholders as returns paid for investments. In some cases instead of issuing a dividend, the company would provide additional bonus shares to existing shareholders as compensation for profit appropriation which is termed as ‘Bonus Issue’.
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