A lot of smart investors try to make the most of the public issues like rights and bonus issues. The primary purpose of investors is to get a tax benefit along with profit. Bonus stripping in mutual funds schemes only comes under the purview of Section 94 of the Income Tax Act, 1961, due to a loophole. This act states that an investor should buy units of the scheme, at least three months before the bonus and should stay invested for at least six months.
Bonus stripping is nothing but the practice of purchasing mutual fund units or stocks to take part in the bonus issue. This allows investors to book losses on the original investment value and then set it off. Our Director, Mr Vaibhav Sankla says that there are two ways in which an investor can take advantage of bonus stripping from a tax point of view.
However, bonus strippers, who mostly hedge their position through derivatives, should be careful of the liquidity in the derivatives market. This can be a problem, particularly when there are a large number of bonus issues. Investors should also keep in mind that, sometimes, some companies only announce bonus issues to support their market capital. Investors can lose money if this happens to be the case.
The law also says that if a transaction does not reflect a commercial substance but results in lower tax, the tax department can recalculate the tax after cancelling the benefit.
To understand the two scenarios where bonus stripping can be beneficial to investors you can read the original article in the link given below. The article featuring Mr Vaibhav Sankla was published in ‘Business Standard’.
Source : Business Standard