How to save tax via bonus stripping

This query is : Resolved

Guest

Guest (Querist)

11 December 2012
Q-If your Client is crorepati, have ample Money to hold and have good taxable income but dont want to pay much tax. What to do then?

A- Go for bonus stripping in equity shares. note- Under section 94(8) only bonus shares held under the mutual fund units are covered. search for any Cum-bonus shares of good companies in NSC or BSC, Suppose you purchased 1000 shares and it it is rs. 600/share. and its record date is before end of relevant financial year. After the record date you will get bonus share say 1:1, your total holdiing will be 2000 shares now and the share price will automatically get dropped at Rs 300 per share. Sell the original shares at Rs 300 or more your computation will be

Sales consideration (Rs300x1000 shares)
300000
Less-Cost of acqusition (Rs 600x1000 shares)
600000

STCG/ STCL
300000

This Short term capital loss can be set off with current year incomes and your total taxable income will be less and you have to pay less tax.

Hold the bonus shares for 1 year (12 months) and make it Long term capital asset. Sell it through stock exchange and pay STT @ 0.1% your tax will come Rs 300. and you will get exemption under section 10(38).

In this whole process you ll habe to pay only Rs.300 as tax and you will save Rs 89700 tax.

Assumptions taken-
(1) Stock purchased are of good companies like ITC, HUL whose price remain constant due to huge interference of FIIs
(2) Tax savings (300000 x 30% tax)- Rs 300 paid as STT.

Thanks,

Arindam Mukherjee
7890400605

Guest

Guest (Querist)

11 September 2014 Send ur query on arindammukherjee18@yahoo.com

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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28 July 2024 Bonus stripping can be a tax-saving strategy, but it's essential to understand the tax laws and ensure that you comply with them. Your outline is generally accurate, but let's clarify some points and add details to ensure it's implemented correctly.

### **Understanding Bonus Stripping**

Bonus stripping involves buying shares just before the record date for bonus shares, selling the original shares after the bonus is issued, and then holding the bonus shares to benefit from long-term capital gains tax exemptions. Here's a step-by-step breakdown:

### **1. Buying Shares Before the Record Date**

- **Purchase Date:** Buy shares of a company just before the record date for the bonus issue.
- **Record Date:** This is the date on which the company determines the shareholders eligible for the bonus shares.

### **2. Receiving Bonus Shares**

- **Bonus Issue:** After the record date, you receive additional shares as a bonus. For instance, if you have 1,000 shares and the bonus is 1:1, you receive 1,000 additional shares.

### **3. Selling the Original Shares**

- **Sale Date:** After receiving the bonus shares, sell the original shares at the current market price, which will likely be lower due to the bonus issue. For instance, if the price drops to Rs 300 per share, sell your 1,000 original shares.
- **Calculation of Loss:**
- **Sales Consideration:** Rs 300 × 1,000 = Rs 3,00,000
- **Cost of Acquisition:** Rs 600 × 1,000 = Rs 6,00,000
- **Short-Term Capital Loss (STCL):** Rs 3,00,000 (sales) - Rs 6,00,000 (cost) = Rs 3,00,000 loss

This STCL can be set off against your other short-term capital gains or other income, reducing your taxable income.

### **4. Holding the Bonus Shares**

- **Holding Period:** After selling the original shares, hold the bonus shares for more than 1 year. This qualifies them as long-term capital assets.
- **Selling the Bonus Shares:** When you sell these bonus shares after 1 year, any gain is treated as Long-Term Capital Gains (LTCG), which is exempt from tax under Section 10(38) provided STT is paid.

### **Tax Implications:**

- **Short-Term Capital Loss (STCL):** The Rs 3,00,000 loss can offset other income or capital gains.
- **Long-Term Capital Gains (LTCG):** Gains on bonus shares, after 1 year, are subject to LTCG tax at 10% (plus applicable cess) if not covered by exemption.

### **Regulatory Considerations**

- **Section 94(8) of the Income Tax Act:** This section prevents misuse of bonus stripping where shares in mutual funds are involved. However, it is not applicable to equity shares.
- **Documentation:** Maintain clear records of purchase dates, bonus issue dates, and sales details. Ensure you have proof of transactions and market prices.

### **Example Calculation:**

1. **Buy 1,000 Shares:**
- **Price:** Rs 600/share
- **Total Cost:** Rs 6,00,000

2. **Bonus Issue 1:1:**
- **Bonus Shares Received:** 1,000 shares

3. **Sell Original Shares:**
- **Selling Price:** Rs 300/share
- **Total Sales Consideration:** Rs 3,00,000
- **STCL:** Rs 6,00,000 - Rs 3,00,000 = Rs 3,00,000

4. **Hold Bonus Shares for 1 Year:**
- **LTCG on Bonus Shares:** Exempt from tax under Section 10(38) if STT is paid.

### **Important Considerations:**

- **Avoid Tax Avoidance:** The tax authorities may scrutinize transactions that appear to be primarily aimed at avoiding tax. Ensure that the transactions are genuine and well-documented.
- **Consult a Tax Advisor:** Tax regulations can be complex and subject to change. Consult with a tax advisor or financial planner to ensure compliance and optimize your tax strategy.

This strategy, if done correctly, can help in reducing your tax liability. However, it’s crucial to stay updated with the latest tax laws and consult with a professional to avoid any issues with tax compliance.

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