Bonus stripping of shares, units of REITs, InvITs prohibited in the Budget

Here, we look at what is Bonus Stripping, its taxability and the changes proposed by it. Budget,

bonus stripping

Bonus stripping is an act of buying units of a fund with the intention of earning bonus units and then selling the original units at lower prices. This loss on the sale of the original units is used to set-off against other capital gains.

Suppose an investor named ‘X’ bought 500 units at 100 each just before the record date of 1:1 bonus issuance. After the bonus issue, X has 1,000 units and the unit price will fall 50 each; The unit value of the fund falls in proportion to the bonus units issued after the bonus issue.

In case of bonus stripping, X will sell 500 units at Decide to use the damage of 50 more each after the bonus is issued 25,000 (500X( 100 – 50)) to close against capital gains.

The remaining units earned on bonus can be kept for more than one year. This is to benefit from LTCG tax on equity units, which are taxed at a concessional rate of 10% on excess gains. 1 Lac.

Investors can engage in such activities to optimize the total tax outgo.

To check such activities by investors, there is a clause in the Income Tax Act which does not allow set-off of loss by way of bonus stripping against other capital gains.

Section 94(8) of the Income-tax Act implies that when units are purchased within three months from the record date of issue of bonus and certain units are sold within nine months after the record date, then in such case The loss will be neglected.

In the above case, suppose X sold 500 units within 9 months from the record date, then there was a loss, therefore, ( 25,000 in this case) will be ignored for taxation purpose. However, the amount of loss so ignored shall be treated as cost of acquisition of the units which continue to be with the investor. Here, 25,000 will be the cost of acquisition of 500 bonus units which X puts to sell at a later date.

what’s new?

Earlier, the anti-avoidance section of section 94(8) was applicable only to units of mutual funds.

Apart from mutual funds, it is also proposed to include securities in the budget. Securities include shares. This is to curb bonus stripping activities in the stock market.

Besides this, the Budget also proposes to revise the definition of units to include units of InvIT or new pooled investment vehicles like REIT or AIF.

“Bonus striping is used in AIFs, where bonus units are issued, and some are stripped after being issued to record a loss. There was a need to plug the loopholes in terms of bonus stripping,” said Amit Agarwal, partner, Nangia Andersen India.

The revised definition of ‘units’ would also apply to the dividend stripping provisions of Income Tax applicable to the units of InvIT or REIT or AIF. Dividend stripping is a concept similar to bonus stripping, where users wish to profit from capital losses on the sale of shares at a reduced price after dividends. This concept has little relevance now because, unlike before, dividends are taxable in the hands of the shareholder, and makes tax planning less effective.

Agarwal said, “Amendments can be made to cover REITs/InvITs within the purview of dividend stripping provision of the IT Act, but it will have no effect, as one cannot invoke this section as the income is taxable anyway. is capable.”