Ch.8 · Capital Gains Tax on Mutual Funds · hard
What is the tax treatment of bonus units received in a mutual fund scheme?
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EXPLANATION
When a mutual fund issues bonus units (additional units allotted for free), the cost of acquisition of bonus units is deemed as nil (zero) under the Income Tax Act. When these bonus units are redeemed, the full redemption proceeds constitute capital gains. The holding period for determining LTCG/STCG starts from the date bonus units were allotted. This is similar to bonus shares in equity — cost is nil but full redemption value is taxable.
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