Ch.8 · Dividend and STT Taxation · hard
What is 'bonus stripping' in mutual funds and how is it addressed in tax law?
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EXPLANATION
Bonus stripping involves buying units before a scheme announces bonus units, receiving bonus units (zero cost), then selling original units at a capital loss (since NAV typically adjusts downward after bonus). Section 94(8) of the Income Tax Act disallows such losses: if original units are sold within 9 months of bonus allotment at a loss, the loss (up to the cost of original units) is disallowed and added to the cost of bonus units instead.
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