Yesterday I have posted an article on Dividend Stripping and Measures to curb it. I got one comment asking whether Dividend Stripping and Bonus Stripping are similar? So I thought of writing an article describing Bonus Stripping to clear the confusion. Both Dividend Stripping and Bonus Stripping are tactics to evade tax by reducing present or future tax liability. (Refer: Consequences of Divined Stripping)
Bonus Stripping u/s 94(8)
Section 94(8) has been inserted with effect form assessment year 2005-06 to curb the practice of creation of losses via Bonus Stripping. Briefly, it says that the loss, if any, arising to a person on account of purchase and sale of original units shall be ignored for the purpose of computing his income chargeable to tax if the following conditions are satisfied:
- The person buys or acquires any units within a period of 3 months prior to the record date,
- He is allotted additional units (bonus units) without any payment on the basis of holding of such units on such date,
- He sells or transfers all or any of the units excluding bonus units within a period of 9 months after such date,
- On the date of sale or transfer he continues to hold all or any (atleast one) of the additional units (bonus units).
Then the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units as are held by him on the date of such sale or transfer.
Remember all the above stated conditions have to be cumulatively fulfilled in order to attract section 94(8).
The Provision of Bonus Stripping under section 94(8)
- Applies to all units whether bought or acquired
- covers both open ended and close ended equity funds
- is applicable even in case where units are held as stock in trade
- is applicable only in respect of units and not shares
- does not apply if all additional units are transferred before the original units are sold.
Indexed cost of Acquisition: Since the loss is considered to be the cost of acquisition of the bonus units held on the date of sale, the benefits of indexation should be available on such deemed cost of acquisition.
ITU Mutual Fund declares 1:1 bonus units on its units on 30th April, 2012. The Fund fixed the record date for bonus entitlement to be 31st May, 2012. Mr. Sanyam purchases 1000 units of ITU Mutual Fund on 20th May, 2012 @ Rs. 20 per unit and sells 1000 original units on 11th November, 2012 for Rs.9 per units.
Since the question is regarding units, section 94(8) should be applied. All conditions are also satisfied here i.e.
- Units are purchased within a period of 3 months prior to record date
- Bonus units are allotted on record date
- Original units are sold within a period of 9 months after the record date while continuing to hold the bonus units.
|Period of Holding||20th May, 2012 to 10th November, 2012||Short Term|
|Sale Price||Rs. 9 X 1000||Rs. 9,000|
|Cost of Acquisition||Rs. 20 X 1000||Rs. 20,000|
Short Term Capital Loss on sale of Units
However, as per section 94(8), the short term capital loss of Rs. 11,000 shall be ignored for the purposes of computing the total income and such STCL of Rs. 11,000 shall neither be set-off nor be carried forward.
The Cost of Acquisition of 1000 bonus units shall be taken as Rs. 11,000 i.e. Rs. 11 per unit.