Bonus Stripping and Dividend stripping
Dividend Stripping: Section 94(7) of Income Tax Act 1961
Dividend stripping is buying shares before dividend is declared and then selling them when they go ex-dividend, when the previous owner is entitled to the dividend. The share price drops by the amount of the dividend on the day the company trades. Under section 94(7) of Income Tax Act 1961, the loss on purchase and sale of shares/units shall not be allowed to set off or carry forward the extent of exempt income received.
Section 94(7) of Income Tax Act 1961is applicable if the following conditions are satisfied:
The person acquires the shares/units within a period of 3 months prior to the record date of dividend.
Dividend received on such units/shares is exempt from tax.
The person sells units within a period of 9 months or shares within a period of 3 months after such record date.
Bonus Stripping: Section 94(8) of Income Tax Act 1961
Bonus stripping is applicable on bonus units. The Bonus units means additional units are allotted without any payment based on holding of original units. Generally, NAV (Net asset value) of the units would fall after record date of bonus units. The loss if any arise to a person on purchase and sale of original units shall be ignored for the purpose of computing taxable income if the following conditions are satisfied;
The person acquires the units within a period of 3 months prior to the record date
Bonus units are allotted on the basis of holding of original units on record date
The person sells all or any of the original units within a period of 9 months after such record date
On the date of transfer he continues to hold all or any of the bonus units.
The provision is applicable even units are held as stock in trade. Further it is applicable only in case of units and not shares. This provision is not applicable if all additional units are transferred before original units.
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