Tax planning is an important part of every investor’s journey. One strategy often used in India is bonus stripping, where investors buy shares or mutual fund units before a bonus issue and sell the original holdings later at a lower price. This creates a capital loss that can offset other capital gains, lowering tax liability.
However, bonus stripping comes with strict conditions under the Income Tax Act and misusing it can lead to disallowed claims. That’s why it’s best to understand how it works before applying it in your portfolio.
If you prefer a tax-efficient yet risk-free option, consider Bajaj Finance FD. With returns up to 7.30% p.a. for senior citizens, it offers predictable growth without market-linked uncertainties. Open FD.
How does bonus stripping work
Bonus stripping generally follows three steps—purchasing units, receiving bonus shares, and selling the original holdings.
- Investors buy shares or mutual fund units before the company announces a bonus issue.
- Once the bonus shares are credited, the price of the original holdings drops.
- Selling the original units at this reduced value creates a capital loss, which can then be adjusted against other capital gains to reduce tax liability.
But there’s a caveat. Section 94(8) of the Income Tax Act states that if bonus units are held for at least nine months, the capital loss from selling original units cannot be adjusted. This was introduced to prevent artificial tax-loss creation.
Unlike bonus stripping, where returns depend on timing and tax rules, Bajaj Finance FD ensures guaranteed, fixed returns with no hidden complexities. Book an FD now!
