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Mayank

@mayankrathi
2 years ago ~420 views
What's bonus stripping? #TaxPlanning #taxoptimisation

Lets say, I bought 10 shares of $HDFC Bank Ltd for Rs. 1500 and the company declares 1:1 bonus i.e. 1 bonus share for every 1 already held. I will now have 10 original shares and 10 bonus shares. The stock will now be in the range of Rs. 750 on the ex bonus date.

As per IT act, the acquisition cost of the bonus share will be 0 and the acquisition cost of original share will remain as Rs. 1500

If I plan to sell my 10 original shares then I will be booking a loss of Rs. 750 (Rs. 1500 - Rs. 750) which I can set off against other capital gains (Short term against short and long term).

If I sell my bonus share then I have to pay tax on Rs. 750 (Rs. 750 - Rs. 0) as the cost is considered as 0. Tax will be 15% if held for less than 1 yr or 10% if held for more than 1 year

Is this beneficial? (cont'd..)
Asset under discussion
HDFC Bank Ltd logo
HDFC Bank Ltd
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Mayank

@mayankrathi
2 years ago ~30 views
Before the IT amendment was done to tax LTCG on listed shares, lot of people used bonus stripping tool to save tax and to arrest any fall in the share price of the bonus share, people used to hedge by selling the Future in the F&O market

But now that LTCG is also taxed at 10%, the benefit isn't much.

In my case tax saved can be 20% of Rs. 750 (loss booked) i.e. Rs. 150

And If I hold my bonus share for 1 year then tax outgo will be 10% on Rs. 750 i.e. Rs. 75.

So, net total saving will be Rs. (150 - 75) = Rs. 75 on a capital of Rs. 750 as I will immediately sell my original share for Rs. 750.

While 10% gain Rs. (75 tax saved / 750 invested) on a 1yr basis sounds interesting, but markets are volatile and any adverse change in the stock price can just jeopardise the maths
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